1 Discuss the potential problems with the implementation of the arbitrage pricing theory. 2 In 2007.

1 Discuss the
potential problems with the implementation of the arbitrage pricing theory.

2 In 2007 and 2008
the return on UK shares was less than the return on UK Government bonds. Why
dont we take the most recent returns for rm rf in the
CAPM rather than the long-term historical average rm rf?

3 Company X has a
CAPM-beta value of 1.3, the risk-free rate of return is 8 per cent and the
historic risk premium for shares over the risk-free rate of return has been 5
per cent. Calculate the return expected on shares in X assuming the CAPM
applies.

Q82;

1

1 Discuss the
potential problems with the implementation of the arbitrage pricing theory.

2 In 2007 and 2008
the return on UK shares was less than the return on UK Government bonds. Why
dont we take the most recent returns for rm rf in the
CAPM rather than the long-term historical average rm rf?

3 Company X has a
CAPM-beta value of 1.3, the risk-free rate of return is 8 per cent and the
historic risk premium for shares over the risk-free rate of return has been 5
per cent. Calculate the return expected on shares in X assuming the CAPM
applies.

Q82;

1 Last year I
bought some shares. The returns have not been as predicted by the CAPM. Is
this sufficient evidence to

reject the CAPM?

2 Share A has a beta
of 2, share B has a beta of 0.5 and C a beta of 1. The riskless rate of
interest is 7 per cent and the

risk premium for the market index has been 5 per
cent. Calculate the expected returns on A, B and C (assuming the

CAPM applies).

3 The risk-free
return is 9 per cent, Company J has a beta of 1.5 and an expected return of 20
per cent. Calculate the risk premium for the market index over the risk-free
rate assuming J is on the security market line.

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