Question 3. Answer all parts of the question

I. The table presents the annual expected returns and standard deviations for three portfolios

and for the market index:

Asset E(r) Alpha 24% Nectar 8.6% Oval 10% Market 10%

Standard deviation 57.5%

14%

27.5% 17.5%

The risk-free rate of interest is 3%. This stock market is in equilibrium according to the capital asset pricing model (CAPM).

(a) Calculate and interpret is the beta value of each of these three portfolios. (7 marks) (b) Do these three portfolios lie on the Capital Market Line and what do you conclude

from this? (7 marks)

(c) Two new securities, Roll and Lock, are introduced to this market at prices which imply expected returns of 13% and 9%, respectively. The expected beta values of 1.8 and 0.7, respectively. Do shares Roll and Lock lie on the Security Market Line and what do you conclude from this? (8 Marks)

III. The share price of Conan is currently 80 and the last dividend was 2.5. The analyst is predicting a dividend growth rate of 4% and the required rate of return is 7%. According to Gordon Growth model, is Conan share fairly priced? (3 marks)

II. Discuss, providing examples, how Efficient Markets Hypothesis can explain the dynamics of financial markets, and critically analyse the management strategy of (a) an active investor, (b) a passive investor, and (c) and a hybrid investor? (800 words maximum).

Question 3. Answer all parts of the question I. The table presents the annual expected returns and standard deviations for three portfolios and for the market index: Asset E(r) Standard deviation Alpha 24% 57.5% Nectar 8.6% 14% Oval 10% 27.5% Market 10% 17.5% The risk-free rate of interest is 3%. This stock market is in equilibrium according to the capital asset pricing model (CAPM). (a) Calculate and interpret is the beta value of each of these three portfolios. (7 marks) (b) Do these three portfolios lie on the Capital Market Line and what do you conclude from this? (7 marks) (e) Two new securities, Roll and Lock, are introduced to this market at prices which imply expected returns of 13% and 9%, respectively. The expected beta values of 1.8 and 0.7, respectively. Do shares Roll and Lock lie on the Security Market Line and what do you conclude from this? (8 Marks) III. The share price of Conan is currently 80 and the last dividend was 2.5. The analyst is predicting a dividend growth rate of 4% and the required rate of return is 7%. According to Gordon Growth model, is Conan share fairly priced? (3 marks) II. Discuss, providing examples, how Efficient Markets Hypothesis can explain the dynamics of financial markets, and critically analyse the management strategy of (a) an 'active' investor, (b) a 'passive' investor, and (c) and a 'hybrid' investor? (800 words maximum). (25 marks) Question 3. Answer all parts of the question I. The table presents the annual expected returns and standard deviations for three portfolios and for the market index: Asset E(r) Standard deviation Alpha 24% 57.5% Nectar 8.6% 14% Oval 10% 27.5% Market 10% 17.5% The risk-free rate of interest is 3%. This stock market is in equilibrium according to the capital asset pricing model (CAPM). (a) Calculate and interpret is the beta value of each of these three portfolios. (7 marks) (b) Do these three portfolios lie on the Capital Market Line and what do you conclude from this? (7 marks) (e) Two new securities, Roll and Lock, are introduced to this market at prices which imply expected returns of 13% and 9%, respectively. The expected beta values of 1.8 and 0.7, respectively. Do shares Roll and Lock lie on the Security Market Line and what do you conclude from this? (8 Marks) III. The share price of Conan is currently 80 and the last dividend was 2.5. The analyst is predicting a dividend growth rate of 4% and the required rate of return is 7%. According to Gordon Growth model, is Conan share fairly priced? (3 marks) II. Discuss, providing examples, how Efficient Markets Hypothesis can explain the dynamics of financial markets, and critically analyse the management strategy of (a) an 'active' investor, (b) a 'passive' investor, and (c) and a 'hybrid' investor? (800 words maximum). (25 marks)