Outline four main assumptions of capital asset pricing model [4 Marks]

b) The average return of the market is 15% and the risk free rate of return is 10%. The returns and beta factors of three securities are shown in the table below:

Security Expected return Beta factor

A 17.5% 1.3

B 14.5% 0.8

C 15.5% 1.1

D 18.2% 1.7

Required:

i) Compute the required return for each security [6 Marks]

ii) State which of the securities are overvalued, undervalued or correctly valued

[6 Marks]

iii) State which of the securities to be retained or disposed [4 Marks]