Question 3:

a. Define market efficiency and distinguish between the three forms of market efficiency.

b. Banco de Sabadell SA has an expected return of 12.13 per cent, its beta is 1.07, and the expected return on the market is 11.5 per cent. What must the risk-free rate be?

c. Equity Y has a beta of 1.4 and an expected return of 18.5 per cent. If the risk-free rate is 2 per cent and the market risk premium is 7.5 per cent, is Equity Y correctly priced?