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Given the following two stocks X and Y Stock ...

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Question

Finance

Given the following two stocks X and Y

Stock

X

Y

Forecast return

8.5%

10.5%

Beta

1.1

1.4

The expected market return is 8% and the risk-free rate is 2%

  1. (10 points) Draw the Security Market Line on an E(r)- diagram. What is the slope of the SML?
  2. (5 points) Plot stocks X and Y on the graph above. Which security would be considered the better buy and why?

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