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The table below gives returns on the market and two shares for the previous two years: Market Return (%) Share A (%) Share B (%) 4 5 -3 23 10 29 (i) The risk free rate is 4%. The expected market return is an equally weighted average of the previous two years' returns on the market. What is the equation for the Security Market Line? (3 marks) (ii) Explain what information the beta of a share conveys. Calculate the betas of shares A and B. (4 marks) (iii) What are the equilibrium returns for shares A and B predicted by the Capital Asset Pricing Model (CAPM)? (4 marks) (iv) If the expected returns on shares A and B are 7.5% and 13% respectively, what are their alphas? How can an investor exploit the information contained in these alphas? po
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