Tut8_2009 - BUS3026W Finance II 2009 Tutorial 8 Due Monday 4 May Question One Security A has a beta of 1.0 and an expected return of 12 Security B has a

BUS3026W Finance II 2009 - Tutorial 8 Due: Monday 4 May ______________________________________________________________ Question One Security A has a beta of 1.0 and an expected return of 12%. Security B has a beta of 0.75 and an expected return of 11%. The risk-free rate is 6%. Explain the arbitrage opportunity that exists; explain how an investor can take advantage of it. Give specific details about how to form the portfolio, what to buy and what to sell. [6] Question Two You have decided to test the validity of the CAPM and have therefore calculated a large number of betas for a range of assets in the market. You have used the JSE’s All-Share Index as your measure of the market portfolio, but your findings indicate that there is no significant relationship between your asset returns and the calculated betas. Do your findings invalidate the CAPM? Why or why not? [5] Question Three Investors expect the market return in the coming year to be 12%. The T-bill rate is 4%. Changing Fortune Industries’ stock has a beta of 0.5. The market value of its outstanding equity is R100 million.