Question 1

a) Consider the following information:

Expected market return = 7%

Standard deviation of market return = 10%

Risk-free rate = 3%

Correlation coefficient between Stock A and the market = 0.5

Standard deviation for stock A = 15%

i) Calculate the covariance of the return on stock A with the market. (10 marks)

ii) Calculate the variance of the market return. (10 marks)

iii) Calculate the Beta of stock A. (10 marks)

iv) Calculate the required return of stock A. (10 marks)

v) Is stock A an aggressive or defensive stock? Explain your reasoning. (10 marks)

b) Critically assess the concept of share beta with particular reference to the security market line. (50 marks)