(a) Inflation is currently a concern in most countries. Is inflation a systematic or unsystematic risk factor for the Australian share market. Explain your answer.

(b) You have the information in the following table. Use it to answer parts i to (v) below. Stock

stock	beta	Standard deviation of annual share returns
A Ltd	1.2	15%
B Ltd	0	20%
C Ltd	0.5	10%

(i) Distinguish between beta and standard deviation in terms of the type of risk measured.

(ii) Which stock,A, B or C, would add the least risk to a diversified portfolio? Explain briefly.

(iii) Which stock would have the highest expected return? Explain briefly.

(iv)According to the CAPM, what would the expected return of B Ltd be equal to? (Note: no calculations required. Think about the SML formula.)

(v) If the market return is expected to fall by 5%o,what change in C Ltd's return should we expect?

Answer rating: 100% (QA)

a Inflation is typically considered a systematic risk factor for the Australian share market System... View the full answer