QUESTION 1

(a) Differentiate between Pure Play approach and the Subjective Approach of the divisional cost of capital (6 marks) (b) Return on Bank Negara Treasury Bills 7.20% Return on FBMKLSE CI 10.80% Beta for Axiata Berhad 1.25

(i) Draw the security market line (SML) on a set of nondiversifiable risk (x axis)required return (y axis) axes. (3 marks)

(ii) Use the CAPM to calculate the required return, , and depict asset Axiatas beta and required return on the SML drawn in part (a). (4 marks)

(iii) Assume that as a result of recent economic events, inflationary expectations have declined by 2%, Draw the new SML on the axes in part a, and calculate and show the new required return for asset Axiata. (5 marks)

(iv) Assume that as a result of recent events, investors have become more risk averse, causing the FBMKLSE CI Return to rise by 1.5%. Ignoring the shift in part c, calculate and show the new required return for asset Axiata. (3 marks)

(v) From the previous changes, explain what can be drawn about the impact of (1) decreased inflationary expectations and (2) increased risk aversion on the required returns of risky assets. (4 marks)