1. Calculate the expected returns of companies AB and DE by using the Capital Asset Pricing Model (CAPM). The beta for stock AB is 1.6 and for stock DE is 0.8; UK gilts provide 2.2% and the return on the FTSE100 is expected to be 8%.

2. b) If the actual expected returns on stock AB and DE are 12% and 4% respectively, would you say the shares are undervalued, fairly- valued, or

overvalued? Provide reasons for your answer.

c) CriticallyexplaintheCapitalAssetPricingModelbystatingits assumptions and limitations and explain why the Fama and French

model is considered an improved version of the CAPM.