Question 1

Benjamin Corporation, a growing computer software developer, wishes to determine the required return on asset Z, which has a beta of 1.5. The risk-free rate of return is 7%; the return on the market portfolio of assets is 11%.

(i) Find the required return of asset Z.

(ii) What does beta 1.5 mean?

Question 2

(i) What is the total risk of a security?

(ii) Explain each of the risk with an example.

Question 3

What is CAPM model is all about?

Question 4

Calculate the value of the risk-free rate if:

Market return : 9%

Beta :1.5

Required return : 12%

Question 5

Explain Markowitz Portfolio theory.

Question 6

Beta coefficient in CAPM model measure what risk? Provide example

Question 7

Briefly discuss three the criticism of CAPM model.

Question 8

You are using the arbitrage pricing model to estimate the expected return on Bethlehem Steel,and have derived the following estimates for the factor betas and risk premium:

Factor Beta Market Risk Premium

1 1.2 2.5%

2 0.6 1.5%

3 1.5 1.0%

4 2.2 0.8%

5 0.5 1.2%

a. If the risk-free rate is 5%, estimate the expected return on Bethlehem Steel.

b. Now assume that the beta in the capital asset pricing model for Bethlehem Steel is 1.1 and that the market risk premium for the market portfolio is 5%. Estimate the expected return using the

CAPM.

c. Why are the expected returns different between the two models?