Suppose that the risk free rate (rRF) is 4%, the market return (rM) is 10%, and the systematic risk (beta) of stock i is 1.2.
a) Write down the equation of the CAPM and find the required rate of return (RRR) of this stock.
b) Draw the SML based on the above information. Make sure to label the verticle and horizontal axes. Be sure to show the values of the following labels: ( rRF, rM, and RPM)
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