Academic Help Online

ASB-3207Financial Economics.Coursework assignment, 2011-12. Deadline: 7 Dec 2011.Answer all parts. This assignment carries a 25% weighting in the overall module assessment. 1. Consider the following information about the characteristics of two securities, A and B; the market portfolio, M; and the risk-free rate of return: Security ?(Ri, RM) ?(Ri) A 0.5 0.4 B 0.7 0.8 E(RM) = 0.25 ?(RM) = 0.75 RF = 0.06 ?(Ri, RM) denotes the correlation between the returns on security i and the returns on the market portfolio; ?(Ri) denotes the standard deviation of the returns on security i, E(RM) denotes the expected return on the market portfolio; ?(RM) denotes the standard deviation of the returns on the market portfolio; and RF denotes the risk-free rate of return. (a) Calculate ?i (beta) for each of the following: (i) Security A (ii) Security B (b) According to the Capital Asset Pricing Model (CAPM), what are the expected returns for securities A and B? (c) Write down expressions for the characteristic lines for securities A and B. Draw sketches of the characteristic lines for securities A and B. Explain briefly how you would interpret the characteristic lines. (Word length for Q1C: 500 words) (20 marks) 2. “In many respects, the APT is considered a general case of the CAPM”. With reference to the limitations of the CAPM, discuss this statement. (Word length for Q2: 800 words) (50 marks) 3. With reference to specific factors, discuss how multifactor models perform in explaining individual security returns. (Word length for Q3: 800 words) (30 marks)

READ ALSO :   answer the following