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1. Use the following information to evaluate whether or not you should buy stock A...

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1. Use the following information to evaluate whether or not you should buy stock A (assume you already own a well- diversified portfolio and are debating whether or not to add this stock to your portfolio). Show your work and justify your decision appropriately with financial theory. Stock A Stock A Probability S&P 500 (Market) Probability S&P 500 (Market) Return Return 0.10 -70% 0.25 -20% 0.20 -20% 0.50 12% 0.50 14% 0.25 28% 0.20 60% The current yield on the 10-year Treasury Note (risk-free rate) is 2.6%. The correlation between Stock A and the market is 0.50. Hint One - Remember that the S&P 500 represents the market and that you can use the two probability distributions above to get the expected return and standard deviation for both Stock A and for the market (round calculations to 2 decimal places in percentage terms). Hint Two - You will use the SML to get the required return and you will need to calculate beta from the data provided (round beta to two decimal places)

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