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# Calculating expected returns and expected prices

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1). Consider the following data for two risk factors (1 and 2) and two securities (J and L).
rf = 0.05 bJ1 = 0.80
rm1 = 0.02 bJ2 = 1.40
rm2 = 0.04 bL1 = 1.60
bL2 = 2.25

a. Compute the expected returns for both securities.
b. Suppose that security J is currently priced at \$22.50 while the price of security L is \$15.00. Further, it is expected that both securities will pay a dividend of \$0.75 during the coming year. What is the expected price of each security one year from now?

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#### Solution Preview

Please refer attached file for better clarity of formulas in MS Excel.

A. rj=rf+bj1*rm1+bj2*rm2=12.20% Expected Return for ...

#### Solution Summary

Solution describes the steps to calculate expected returns and expected price of given securities.

\$2.49