QUESTION 2 (30 MARKS)

The following are expected returns on two shares: PRICEWORTH INTERNATIONAL BERHAD (PWORTH) and RIMBUNAN SAWIT BERHAD (RSAWIT) and for the markets for four months (January until April 2020): Month Return on FBM KLSE CI Return on Stock RSAWIT 5.60% 12.20% January February March April Return on Stock PWORTH 15.20% 8.05% 4.025% -0.80% 2.085% 6.455% 8.655% 10.417%

(a) Calculate the betas for the two stocks. (10 marks)

(b) Illustrate the Capital Asset Pricing Model (CAPM) based on conceptual, graphically and mathematically. (15 marks)

(c) In light of the problems of the CAPM, the APT model was proposed as an alternative. Explain how does the APT overcome the shortcoming of the CAPM. (5 marks)