Question: 3. CAPM [11 marks] Here are data on two companies. Company Forecasted Return Standard Deviation of returns Beta A 4% 12% 1.5 B 5% 8%

3. CAPM [11 marks] Here are data on two companies. Company

3. CAPM [11 marks] Here are data on two companies. Company Forecasted Return Standard Deviation of returns Beta A 4% 12% 1.5 B 5% 8% 1.0 The T-bill rate is 2% and the expected market return is 4%. a) What are the CAPM implied return of these two companies? [4] b) Draw the Security Market Lines (SML) on the expected return-beta plane. Mark Company A and Company B on your chart. Are they overpriced, fairly priced or underpriced? [7]

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