Question 1 (20 Marks) a) The Capital Asset Pricing Model (CAPM) originally coined by Sharpe and Linter, is an important asset pricing model used in both industry and academia. Describe the intuition behind the model, and why it is useful in finance. (8 Marks) b) Consider the following statement: "Local Systems Ltd released its annual earnings figure a month ago. On the day of the announcement, the company's return was 1.5%, while its expected return on that day was 0%. Since the announcement, the company's stock price has continued to increase gradually, to this day. " Critically discuss this statement, in the context of the notion of market efficiency. (6 Marks) c) You observe that the yield curve is as follows: Yield to Maturity Time to Maturity Given the nature of this curve, and using the theories of term structure, discuss the possible reasons for the shape of the yield curve above. (6 Marks) Question 1 (20 Marks) a) The Capital Asset Pricing Model (CAPM) originally coined by Sharpe and Linter, is an important asset pricing model used in both industry and academia. Describe the intuition behind the model, and why it is useful in finance. (8 Marks) b) Consider the following statement: "Local Systems Ltd released its annual earnings figure a month ago. On the day of the announcement, the company's return was 1.5%, while its expected return on that day was 0%. Since the announcement, the company's stock price has continued to increase gradually, to this day. " Critically discuss this statement, in the context of the notion of market efficiency. (6 Marks) c) You observe that the yield curve is as follows: Yield to Maturity Time to Maturity Given the nature of this curve, and using the theories of term structure, discuss the possible reasons for the shape of the yield curve above. (6 Marks)