You have determined that the returns for risky securities is determined by the following multi-factor model:

Ri = 0 + b1(f1) + b2(f2)

Up and Down companies have the following reaction coefficients:

b1 b2

Up Co. 0.5 1.1

Down Co. 1.85 0.6

a) If your estimate for f1 is 0.05 and for f2 is 0.1 what would be your best estimate of the expected return for each security if treasury bills are yielding 5%? (4)

b) Your analysis of the Up and Down Co.s' historical performance is contained in the following table:

Return (%)

2011 2012 2013 2014 2015

Up Co. -5 18 9 22 11

Down Co. 10 13 -7 29 15

Based on your expected return for next year which share would you choose on a risk-adjusted basis? (13)

c) Middle Co. is selling for R9. You estimate that its next dividend will be R0.63 per share and that dividends are likely to grow at an average of 6% in the foreseeable future. The company has a beta of 0.75 and a D/E ratio of 60% and pays tax at the company tax rate of 30%. Calculate the share's alpha if the expected return on the market is 18% and the risk-free rate is 4.5%