1. Based on the CAPM, explain in detail how to identify investors who are more risk averse.

(10 marks)

2. The market price of a security is 40, the security expected return is 13%, the riskless rate of interest is 7%, and the market risk premium [E(R_m R_f)], is 8%. If its expected future payoff remains the same but the covariance of its rate of return with the market portfolio doubles then, according to the CAPM (show all the details of your calculations):
   1. Calculate the securitys rate of return?
   2. Calculate the securitys current price?
      10. marks each = 20 marks)

3. Answer the following questions:
   1. Explain what an interest rate swap is
   2. Give an example of how a company can use an interest rate swap to offset risks.

(10 marks each = 20 marks)