Solve these ones out.

1 An investor has the choice of the following assets that earn rates of return as follows in each of 1 style the four possible states of the world: State Probability Asset 1 Asset 2 Asset 3 0.2 5% 5% 5% 0.3 5% 12% 5% 0.1 5% 3% 4% 0.4 5% 1% 7% Market capitalisation 10,000 17,546 82,454 Determine the market price of risk assuming CAPM holds. Define all terms used. [6] 2 (i) Explain what is meant by specific risk and systematic risk in the CAPM. (ii) Explain the meaning of the 'beta' of a share, and describe how you would calculate it for: (a) a company (b) a portfolio. (iii) Explain how the beta for a portfolio can be used to determine the expected return for the portfolio. (iv) Why might the beta calculated in (ii)(a) be inappropriate for practical use? 3 State the assumptions of the capital asset pricing model (CAPM). [5] I style (Wi) An investment market consisting of a risk-free asset and a very large number of stocks is such that, for modelling purposes, the market capitalisation of the k-th stock can be expressed as: where k = 1,2,3,... The expected return on the k-th stock (expressed as a percentage) is: 250 -(*-1) +5/1-e (*-1)) Assuming that the CAPM assumptions hold, find the expected return on the portfolio of risky assets held by each investor. [5] [Total 10]iii iii} \"1 iii} Within the context of the capital asset pricing model, explain what is meant by the \"market price of risk'- [3] Show how the security market line relationship can be rearranged to giye an expression for the expected return in terms of the market price of risk 3'\