PART A: CAPITAL ASSET PRICING MODEL

The Capital Asset Pricing Model $($CAPM$)$ describes the relationship between systematic risk, or the general perils of investing, and expected return for assets, particularly stocks. The model is based on the relationship between an asset's beta, the risk$-$free rate $($typically the Treasury bill rate$),$ and the equity risk premium

Explain how the capital assets pricing model can be used to calculate a project specific discount rate and discuss the limitations of using the capital assets pricing model in investment appraisal.

$(10$ marks$)$

Harrods shares has a beta of $1\mathrm{.}5$ and a risk$-$free rate of $2$ percent. The expected return on the market portfolio is $14$ percent. Calculate the Capital Asset Pricing Model $($CAPM$)$ on the shares.

$(5$ marks$)$

Ms Halina is one of your colleagues has appointed to manage a RM$5$ million portfolio. The portfolio has a beta of $1\mathrm{.}25$ and a required rate of return of $12$ percent. The current risk$-$free rate is $5\mathrm{.}25$ percent. In addition, Ms Halina received another RM$500,000.$ If she decides to invest the money in a stock that has a beta of $0\mathrm{.}75.$ Ms Halina needs to find the required return on RM$5\mathrm{.}5$ million portfolio to be presented in a meeting. She also needs to explain the require return and interpret their findings.

Based on information above:

a$.$ Find the required return on RM$5\mathrm{.}5$ million portfolio to be presented in a meeting.

$(13$ marks$)$

b$.$ Based on the answer $3($a$),$ explain the require return and interpret their findings.

$(6$ marks$)$

$($a$)$ Zacher Corporation's share has a beta of $1\mathrm{.}40,$ the risk$-$free rate is $4\mathrm{.}25$ percent, and the market risk premium is $5\mathrm{.}50$ percent. Compute the firm's required rate of return.

$(6$ marks$)$

$($b$)$ Nystrand Corporation's stock has an expected return of $12\mathrm{.}25$ percent, a beta of $1\mathrm{.}25,$ and is in equilibrium. If the risk$-$free rate is $5$ percent, compute the market risk premium for the stock.

$(5$ marks$)$

$($c$)$ The expected return on the market is $12$ percent. The current risk$-$free rate is $6$ percent. Calculate required rate of return of a share with a beta of $0\mathrm{.}66.$

$(5$ marks$)$