Suppose you observe the following situation:
Security
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)
