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Consider the following information: Share Beta Implied return A 0.75 5.50% B 1.08 11.80% C 1.72 8.30% D 1.3 6.80% E 1.2 5.90% (a) According
- Consider the following information:
Share | Beta | Implied return |
A | 0.75 | 5.50% |
B | 1.08 | 11.80% |
C | 1.72 | 8.30% |
D | 1.3 | 6.80% |
E | 1.2 | 5.90% |
(a) According to CAPM, which shares are undervalued if the risk-free rate of return is 2 percent and the market rate of return is 5 percent. (2 marks)
(b) Currently, your portfolio consists of $4,000 invested in share C and $3,000 in share D . You have another $12,000 to invest and want to divide it between share E and a risk-free asset. You want your portfolio beta to be 1.1. How much should you invest in the risk free asset?
(2 marks)
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