The assignment has 4 parts, carrying a weight of 25% each. Please attempt all parts. Question 1 a) Company X has a beta value of 1.3, the risk-free rate of return is 8% and the historical risk premium for shares over the risk-free rate of return has been 5%. Calculate the return expected on shares in X assuming the CAPM applies – 12 Marks b) The risk-free return is5%,Company J has a beta of 1.5 and an expected return of 20%. Calculate the risk premium for the share index over the risk-free rate assuming J is on the Security Market Line, along with calculating the market return (providing an explanation for the securities market line). What can you comment about the market risk premium in this case? Question 2 A) Assuming Treasury bills yield is 1 % and the market risk premium is 7%. If your portfolio beta is still 0.25, what is the expected return on this strategy? b) The following table shows beta for several companies. Calculate each stock’s expected rate of return using CAPM, assuming the risk free rate is 4% and the risk premium for the market portfolio is 7%. What is your portfolio beta if you construct an equally weighted portfolio using all stocks? What can you say about this portfolio relative to the market? Stock beta Apple 1.35 Johnson & Johnson. 0.69 IBM 1.10 Question 3 i) Describe how equity and bond markets function, clearly explaining valuation/pricing methods within each market, the importance of each market to both individual investors, corporate decision-makers and the economy, and the impact of interest rate movements on each market. Question 4 a) Using the CAPM as a benchmark, explain the Fama and French Three Factor Model, paying close interpretation to the calculation and interpretation of each risk factor. – 10 Marks b) YouhaveachoicetoinvestineitherportfolioAorB.Basedonthevaluesprovided below, what can you say about each portfolio’s risk adjusted performance? Which portfolio do you choose to invest in? Please provide rationale for your answer. Portfolio A: Return 8% Variance- 2,4% Beta-1,2; SMB-0,8; HML-1.6; Risk free rate-1% Portfolio B:Return 6% Variance- 1,7% Beta-0,7; SMB-0,5; HML-1.5; Risk free rate-1%. Assignment brief:Marking Criteria Calculating market return, stating formula for CAPM, calculating expected return, explaining the interpretation of beta Calculate market return, and risk premium, what does a beta of 1.5 mean, what is the securities market line. Calculating market return, portfolio beta is part a, and each stocks expected return in part b, using CAPM, identifying weights for an equally weighted portfolio, calculating portfolio beta. Explanation of what is the bond market, stock market.Explanation of how instruments are priced and traded within each market The importance of each market to both individual investors, corporate decision- makers and the economy.The impact of interest rate movements and macroeconomic factors on each market. Explain CAPM, each component within the model along with the sole risk factor, how is the FF 3factor model constructed as an extension to CAPM, explaining each of these additional risk factors and their interpretation, how are each of these additional risk factors calculated, discuss return on each portfolio A and B, what does variance represent? Discussing all risks associated with both portfolios, finally stating which portfolio to invest in, along with providing rationale