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Unformatted text preview: Chapter 10
Question 4 Input area: Quick Check using formula Portfolio value Stock X E(R) Stock Y E(R) Portfolio E(R) $10,000 14.00% 9.00% 12.20% Weight X (.14) + Weight Y (.09) = .64 (.14) + .36 (.09) .0896 + .0324 = 0.122 or 12.20% Output area: .64 (10,000) = $6,400 in Stock X .36 (10,000) = $2,600 in Stock Y Weight of Stock X Weight of Stock Y Dollar in Stock X Dollars in Stock Y 0.6400 0.3600 $6,400.00 $3,600.00 Question 1022
Rewardtorisk Ratio = Expected Return  Risk Free Rate / Beta Market Risk Premium = SML = Reward / risk ratio SML (Reward/Risk Ratio) = Expected Return  Risk Free Rate / Beta If these two do not equal, the stock can be undervalued or overvalued. If they equal, then the stock will fall on the SML line. k Check using formula ght X (.14) + Weight Y (.09) = .122 (.14) + .36 (.09) 6 + .0324 = 0.122 or 12.20% (10,000) = $6,400 in Stock X (10,000) = $2,600 in Stock Y ...
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This note was uploaded on 02/14/2011 for the course FINANCE 610 taught by Professor Siad during the Fall '09 term at UMBC.
 Fall '09
 Siad
 Corporate Finance

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