BUS3026W Finance II 2009  Tutorial 6
Due: Monday 20 April
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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 riskfree 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 shortterm government securities (perceived to
be riskfree) 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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 Summer '09
 DrToerien
 Finance, Capital Asset Pricing Model, capital asset pricing, Asset Pricing Model

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