Answer question 2(i)

wl H5 X Week 2 Activity - Word VIEW FILE HOME INSERT DESIGN PAGE LAYOUT REFERENCES MAILINGS REVIEW Sign in FE0810S WEEK 2 ACTIVITY: FORMATIVE ASSESSMENT 1. Discuss the assumptions of the Capital Asset Pricing Model (CAPM) and explain how these assumptions relate to the real world' investment decision process. [4] 2. Evaluate Figure 1 below and answer the subsequent questions E(R) Capital Market Line Market Portfolio RE D) According to the capital asset pricing model, the individual investor's equilibrium utility maximization is depicted below. Briefly explain how an investor's can maximize utility at point A as well as point B. [4] ii) Explain the risk-return characteristics of the market portfolio in the figure above. 3.Suppose that the expected return on the market portfolio E(R) = 0.07, return on the risk- free rate ry = 0.01 and a variance on = 0.025. Use the Capital Asset Pricing Model (CAPM) to calculate the expected return of a risky asset i that has a covariance im = 0 with the market return, also interpret the beta of this security 4. Securities A and B have forecasted returns of 14% and 18% over the next 12 months. During the same period, the market (M) is expected to generate returns of 16%. If the risk-free rate is 6%, and BA = BB = 1.1, use the CAPM and the SML to determine whether the securities are correctly valued [4] PAGE 1 OF 1 224 WORDS + 71% 1 07 e 2:03 PM 5/22/2020 58 wl H5 X Week 2 Activity - Word VIEW FILE HOME INSERT DESIGN PAGE LAYOUT REFERENCES MAILINGS REVIEW Sign in FE0810S WEEK 2 ACTIVITY: FORMATIVE ASSESSMENT 1. Discuss the assumptions of the Capital Asset Pricing Model (CAPM) and explain how these assumptions relate to the real world' investment decision process. [4] 2. Evaluate Figure 1 below and answer the subsequent questions E(R) Capital Market Line Market Portfolio RE D) According to the capital asset pricing model, the individual investor's equilibrium utility maximization is depicted below. Briefly explain how an investor's can maximize utility at point A as well as point B. [4] ii) Explain the risk-return characteristics of the market portfolio in the figure above. 3.Suppose that the expected return on the market portfolio E(R) = 0.07, return on the risk- free rate ry = 0.01 and a variance on = 0.025. Use the Capital Asset Pricing Model (CAPM) to calculate the expected return of a risky asset i that has a covariance im = 0 with the market return, also interpret the beta of this security 4. Securities A and B have forecasted returns of 14% and 18% over the next 12 months. During the same period, the market (M) is expected to generate returns of 16%. If the risk-free rate is 6%, and BA = BB = 1.1, use the CAPM and the SML to determine whether the securities are correctly valued [4] PAGE 1 OF 1 224 WORDS + 71% 1 07 e 2:03 PM 5/22/2020 58