QUESTION TWO:

A) The following information is provided on specific shares of companies in the stock market with their respective Beta factors.

	STOCK MARKET X PARTICULARS
Types of share		A	B	C	D	E	F
Beta factor		0.4	1.6	0.2	1.3	1	1.5

Additional information

The government bonds in this market have a return of 8%

The average market return is 14%

Required

i ) Prove the adage in financial thinking that higher the risks the higher the returns (10 marks)

ii ) How will you differentiate the Gordon Model,Market Model and CAPM in determining the cost of capital ( 5 marks)

iii ) Discuss with practical examples how informational efficiency will help you to make key financial management decisions. (15 marks)