Answered: You are given the following data about…

You are given the following data about Asset A and Asset B. Asset A Asset B Expected returns 8.6% 7.9% Standard Deviation 3.8%

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 4QE

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Question

You are given the following data about Asset A and Asset B.

Asset A Asset B

Expected returns 8.6% 7.9%

Standard Deviation 3.8% 4.6%

Assuming that an investor is to choose between Asset A or Asset B, explain which asset

a rational investor will choose.

c) With the use of a diagram, explain why an investor will always choose a point on the

SML line.

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