a) Outline four main assumptions of capital asset pricing model

b) The average return of the market is 15% and the risk free rate of return is 10%. The returns and beta factors of three securities are shown in the table below:

Security           Expected return           Beta factor

      A                           17.5%              1.3

      B                           14.5%              0.8

      C                           15.5%              1.1

      D                           18.2%              1.7

Required:

i) Compute the required return for each security                                                        [6 Marks]

ii) State which of the securities are overvalued, undervalued or correctly valued                

[6 Marks]

iii) State which of the securities to be retained or disposed                                       [4 Marks]