The estimated rates of return, beta coefficients and standard deviations of some securities are as given below:

Security Estimated returns% Beta Standard deviation%

A 35 1.60 50

B 28 1.40 40

C 21 1.10 30

D 18 0.90 25

E 15 0.75 20

F 12 0.60 18

The risk-free rate is 10%. The market return is expected to be 25%

Required:

(a)Determine which of the above securities are overpriced and which are under priced.

(b)CAPM postulates the nature of the relationship between the expected return and the systematic risk of security. Briefly, justify this statement.

Question two

Monthly return data (%) for Kakuzi stock and the NSE index for a seven months period are presented below:

Month kakuzi NSE

1 -0.65 1.2

2 4.34 2.8

3 -3.54 0.32

4 7.42 5.55

5 0.45 1.13

6 2.60 1.00

7 -3.81 -2.45

Required

(a)Calculate the alpha and beta of Kakuzi limited.

(b)Interpret your answer using your answer above.

Suppose NSE index is expected to move up by 18% next month. How much return would you expect from Kakuzi limited.