64 65 66 67 68 69 70 Question Five a) What risk does beta measure? (4 Marks) b) Explain how the beta of a portfolio is found. (4 Marks) c) Explain the meaning of each variable in the Capital Asset Pricing Model (CAPM) (6 marks) d) Currently under consideration is a project with a beta of 1.5. At this time, the risk-free rate of return is 7%, and the return on the market portfolio of assets is 10%. The project is actually expected to earn an annual rate of return of 11%. i) Use CAPM to find the required return on this investment (2 marks) 11) Would you recommend this investment? Explain (2 marks) 111) Assuming that the market return drops to 9%, what impact would this have on your recommendation in ii) above? (2 marks) 71 72 73 74 75 76 77