(i) What assumption underlie the capital asset pricing model (CAPM)? (5 marks)

(ii) Many of the underlying assumptions of CAPM are violated in the real world. Does that fact invalidate the models conclusions? Explain. (4 marks)

The managing director of Bicdo Ltd., a company quoted on the Nairobi Stock Exchange (NSE) has asked you to assist in estimating the firms equity beta co-efficient. The firm is all equity financed and listed in the NSE five years ago. You have gathered the following information from the NSE for the last four years:

Bicdo Ltd.	Nairobi Stock Exchange
Year	Average share Price Sh.	Dividend per share Sh.	Average NSE index	NSE Dividend yield %	Return on Government stock %
2000 2001 2002 2003	69.5 73.5 81.5 92.5	3.5 4.25 4.5 5.0	2,600 2,990 3,040 3,280	3 5 5.5 5.5	7 9 8 8

Required:

Use the capital asset pricing model (CAPM) to estimate the beta of Bicdo Ltd. (3 marks)