Section C - Long Answer Questions

1. Shares in Liwa Chem (L) and Sur Plastic (S) lie on the security market line.
   1. What is the riskless rate of return and the risk premium on the market index portfolio? (3 marks)
   2. Share of Al Ain Chemicals has an expected return of 19 per cent and a beta of 0.6. What is likely to happen to the price and return on shares in Al Ain Chemicals assuming the share has same riskless rate of return and risk premium as that of L and S. (2 marks)

	Share (L)	Share (S)
Expected return	20%	25%
Beta	1.3	1.8
(assume the CAPM holds)