% Return on T-Bills, Stocks, and Market Index
State of the Economy	Probability	T-Bills	Phillips	Pay-up	Rubber-Made	Market Index
Recession	0.2	7	-22	28	10	-13
Below Average	0.1	7	-2	14.7	-10	1
Average	0.3	7	20	0	7	15
Above Average	0.3	7	35	-10	45	29
Boom	0.1	7	50	-20	30	43
Mean
Standard Deviation
Coefficient of Variation
Covariance with MP
Correlation with Market Index
Beta
CAPM Req. Return
Valuation (Overvalued/Undervalued/Fairly Valued)
Nature of stock (Aggressive/Defensive)

Question 1 (18 marks)

Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items. Each line item is worth 2 marks

Question 2 (8 marks) Using the data generated in the previous question (Question 1)

a) Plot the Security Market Line (SML) (2 marks)

b) Superimpose the CAPMs required return on the SML (2 marks)

c) Indicate which investments will plot on, above and below the SML? (2 marks)

d) If an investments expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph (2 marks)

Question 3 (4 marks) From the information generated in the previous two questions;

a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50- 50 investment allocation in each investment alternative (1 mark)

b) Compute the expected return of the portfolio thus formed (1 mark)

c) Compute the portfolios beta. Is the portfolio aggressive or defensive? (2 marks)