a. Researchers have shown that the best measure of risk of a security in a large portfolio is the beta of the security, which is captured in the Capital Asset Pricing Model (CAPM). In your own words, briefly explain what beta is? Interpret the beta of zero (0) relative to the market. (2 marks)

b. There are two approaches to estimate cost of equity: CAPM and the dividend growth model. Briefly explain, in your own words, the disadvantages of cost of equity estimation using CAPM. (2 marks)

c. Fama (1976) finds that the portfolio standard deviation decreases with the number of shares included in the portfolio, at a diminishing rate, to a positive and constant level of standard deviation. Explain briefly, in your own words, (i) why the portfolio standard deviation decreases; and (ii) why the decreasing rate of portfolio standard deviation stop after reaching a positive and constant level. (2 marks)

d. From a theoretical perspective, define the market portfolio. In your answer, elaborate how a market portfolio could be proxied by. (2 marks)