Tut6_2009 - BUS3026W Finance II 2009 - Tutorial 6 Due:...

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BUS3026W Finance II 2009 - Tutorial 6 Due: Monday 20 April ______________________________________________________________ Question One You are given the following information about two shares in the market. Share Forecast Return Beta A 31% 1.5 B 11% 0.5 The risk-free rate in the market is 5%. The correlation between the two shares is 0.5 and the return on the market is 21%. a. Are both shares correctly priced? Why or why not? If not, state whether they are over- or underpriced, giving reasons for your answers. b. Assuming that you find the shares are not correctly priced. How would the market adjust the prices of those shares in order to restore equilibrium? Question Two Suppose the rate of return on short-term government securities (perceived to be risk-free) is about 5%. Suppose also that the expected rate of return required by the market for the portfolio with a beta of 1 is 12%. According to the capital asset pricing model (security market line); a. What is the expected rate of return on the market portfolio?
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This note was uploaded on 06/01/2011 for the course FIN 3026W taught by Professor Drtoerien during the Summer '09 term at University of Cape Town.

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Tut6_2009 - BUS3026W Finance II 2009 - Tutorial 6 Due:...

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