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FIN351: lecture 6

FIN351: lecture 6

Example 1

You have $1 million of your own money to invest in stock A and B. You short-sell  $1 million stock A and then invest in stock B. The expected returns for stock A and B are 15% and 20%, respectively. The risk-free rate is 5%. Stock A has a beta of 1.5 and stock B has a beta of 2.0.The expected rate of return for the market portfolio is 13%.

Please use two approaches to calculate the expected rate of return on your portfolio?  

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