• Consider the following information:

Share	Beta	Implied return
A	0.75	5.50%
B	1.08	11.80%
C	1.72	8.30%
D	1.3	6.80%
E	1.2	5.90%

(a) According to CAPM, which shares are undervalued if the risk-free rate of return is 2 percent and the market rate of return is 5 percent. (2 marks)

(b) Currently, your portfolio consists of $4,000 invested in share C and $3,000 in share D . You have another $12,000 to invest and want to divide it between share E and a risk-free asset. You want your portfolio beta to be 1.1. How much should you invest in the risk free asset?

(2 marks)

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• Consider the following information:

State of Economy	Probability of State of Economy	Rate of Return if the State Occurs
		Omega Ltd	Delta Ltd
Boom	0.7	8%	2%
Bust	0.3	4%	15%

(a) Calculate the expected return on a portfolio consisting of 65 percent investment in Omega and 35 percent in Delta. (2 marks)

(b) Calculate the standard deviation of the portfolio. (3 marks)