Principles of Finance

(a) Assume that you have observed that the stock price of a company has risen steadily each day for the past 30 days. Can you consistently profit from this

and other similar observations:

(i) if the market is not weak form efficient?

(ii) if the market is weak form efficient but not semi-strong form efficient?

(iii) if the market is semi-strong form but not strong form efficient?

(iv) if the market is strong form efficient?

(b) Sketch the efficient frontier if:

(i) All assets are risky;

(ii) A risk-free asset exists in addition to risky assets

On your sketch for (b)(ii), you must indicate where the risk-free asset lies,where the market portfolio lies and where the Capital Market Line (CML) lies.

(c) What is meant by:

(i) Systematic risk (otherwise known as market risk);

(ii) Diversifiable risk (otherwise known as idiosyncratic risk);

(iii) Beta;

(iv) The Capital Asset Pricing Model

(d) Suppose a stock has an 8% expected return, the market expected return is 10%, the risk free rate is 3% and the stock has a beta of 0.7. Is this stock undervalued, overvalued or fairly valued?