Question $7$

a$)$ The standard deviation of returns for stock $P,Q$ and $R$ and the market portfolio are

given in the table along with the correlation coefficient between the stocks and the

market.

The risk$-$free rate is $6\%$ and the expected return for the market portfolio is $10\%.$

i$)$ Calculate the beta coefficient for each stock.

ii$)$ Using the CAPM, compute the expected return for all the stocks.

iii$)$ The estimated stock returns next year for stocks $P,Q$ and $R$ are,

respectively $10\%,3\%$ and $13\%.$ Which stocks are

undervalued$/$overvalued$?$

$(1$ marks$)$

b$)$ Briefly explain the concept of the efficient market hypothesis $($EMH$)$ and each of its

three forins.

$(5$ marks$)$

c$)$ How is the Capital Market Line constructed? Provide a sketch and indicate the

market portfolio, what would you expect to be included in the market portfolio?

$(4$ marks$)$

d$)$ Mari wants to test the weak form of the Efficient Market Hypothesis by comparing a

buy and hold policy to alternative technical trading rules.

Discuss the three common mistakes that might bias their results.

$(6$ marks$)$

e$)$ Why might large institutional investors, with a large proportion of the shares in a

particular company, generally fail to intervene when there are problems within the

company?

$(4$ marks$)$

f$)$ ESG $($environmental$,$ social, governance$)$ investing is increasingly popular, discuss

the difficulties in selecting ESG stocks.

$(4$ marks$)$