Question 1. Capital markets (30 marks in total) Answer the following independent questions: a) Historical nominal returns for Coca-Cola have been 8% and -20%. The nominal returns for the market index S&P500 over the same periods were -15% and 28%. Calculate the beta for Coca- cola. (5 marks) b) The covariance between stocks A and B is 0.0014, standard deviation of stock A is 0.032, and standard deviation of stock B is 0.044. Which of the following is the most appropriate to depict the risk-return characteristics of a portfolio consisting of only stocks A and B, and explain why? (5 marks) (B) (C) c) Assume that using the Security Market Line (SML) the required rate of return (R) on stock A is found to be half of the required return (R) on stock B. The risk-free rate (R) is one- fourth of the required return on A. Return on market portfolio is denoted by Rm. Find the ratio of beta of A (IA) to beta of B (Os). (10 marks) d) Assume that the short-term risk-free rate is 3%, the market index S&P500 is expected to pay returns of 15% with the standard deviation equal to 20%. Asset A pays on average 5%, has standard deviation equal to 20% and is NOT correlated with the S&P500. Asset B pays on average 8%, also has standard deviation equal to 20% and has correlation of 0.5 with the S&P500. Determine whether asset A and B are overvalued or undervalued, and explain why. (10 marks) (Hint: Beta of asset i (, where are standard deviations of asset i and market portfolio, is the correlation between asset i and the market portfolio)