Calculate the expected return of Company As stock under the context of capital asset pricing model (CAPM). (4 marks)

Suppose an investor would like to form a portfolio Q with a beta of 1.1 by using Company Bs stock and the market portfolio. Calculate the weights (in percentage) of Company Bs stock and the market portfolio in portfolio Q. (8 marks)

Further to part B, calculate the expected return of portfolio Q. (4 marks)

Under the context of CAPM the investors are only compensated for the market risk. Do you agree with the statement? Explain. (5 marks)

Between Company B and Company Cs stocks, which one has a steeper security characteristic line (SCL)? Explain your answer. (4 marks)

Question 2 (25 marks) Stock Company A Company B Beta 1.8 ? Expected Return ? 14.7% Inflation rate is 2% p.a. Risk-free rate is 3% p.a. Company C 1.5 16.5% Market Portfolio 1 12%