Question 3:

Which four components define a Capital Asset Pricing Model for assessing required rate of return on company equity? (a) 1.Risk-free rate, expected inflation premium, and a risk premium relating to the sector of economy in which the company is trading 2.Risk-free rate, market rate of return, variance or standard deviation of the market rate of return, and covariance between the rate of return to the company and the rate of return to the market 3.Benchmark return on equity in excess of risk-free rate, plus a general risk premium, divided by the share price 4.Bank average lending rate, plus a risk-free rate and expected foreign exchange rate premium Explain your answer.

(b) Based on your answer in part (a), which of the four components of the CAPM are more sensitive to a rise in consumer price inflation between 2021 and 2022? Why? Which ones are less sensitive? Why? Explain your answer