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Suppose you observe the following situation:

Security

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Ruby

Pearl

Expected Return

14.9%

21.0%

Beta

0.70

2.13

A). If these two securities are correctly priced, calculate the risk-free rate. Round your answer to 4 decimal points. For example, 14.1520% (2 Marks)

B). If these two securities are correctly priced, find the market risk premium (using the findings of Requirement-A). Round your answer to 4 decimal points. For example, 14.1520% (1 Mark)

C). If the current market data shows that the risk-free rate is 3.52 percent, are these securities fairly priced? Comment on your answer. Round your answers to 4 decimal points. (1 Mark)

D). Calculate the expected return and beta of an equally weighted portfolio of these two securities. Round your answers to 3 decimal points. (1 Mark)

solution

 
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