Question 1 :

a. Explain the effect of incorporating borrowing and lending opportunities at the risk-free rate on the efficient portfolios. (5 marks)

b. Explain the relationship between capital market line (CML) and security market line (SML). (7 marks)

c. Discuss how we can identify under-priced and over-priced securities from the security market line (SML). Then explain why or why not mis-pricing can last. (8 marks)

You are NOT required to draw graph(s) when you answer this question.