ASB-3207 Financial Economics. Coursework assignment, 2011-12. Deadline: 4 Dec 2011. Answer all parts. This assignment carries a 25% weighting in the overall module assessment. 1. Consider the following information about the characteristics of two securities, A and B; the market portfolio, M; and the risk-free rate of return: Security (Ri, RM) (Ri) A 0.5 0.4 B 0.7 0.8 E(RM) = 0.25 (RM) = 0.75 RF = 0.06 (Ri, RM) denotes the correlation between the returns on security i and the returns on the market portfolio; (Ri) denotes the standard deviation of the returns on security i, E(RM) denotes the expected return on the market portfolio; (RM) denotes the standard deviation of the returns on the market portfolio; and RF denotes the risk-free rate of return. (a) Calculate i (beta) for each of the following: (i) Security A (ii) Security B (b) According to the Capital Asset Pricing Model (CAPM), what are the expected returns for securities A and B? (c) Write down expressions for the characteristic lines for securities A and B. Draw sketches of the characteristic lines for securities A and B. Explain briefly how you would interpret the characteristic lines. (Word length for Q1C: 500 words) (20 marks) 2. “In many respects, the APT is considered a general case of the CAPM”. With reference to the limitations of the CAPM, discuss this statement. (Word length for Q2: 800 words) (50 marks) 3. With reference to specific factors, discuss how multifactor models perform in explaining individual security returns. (Word length for Q3: 800 words) (30 marks)ASB-3207 Financial Economics. Coursework assignment, 2011-12.

Deadline: 4 Dec 2011.  Answer all parts.

This assignment carries a 25% weighting in the overall module assessment.

1. Consider the following information about the characteristics of two securities, A and B; the market portfolio, M; and the risk-free rate of return:

Security (Ri, RM) (Ri)

A 0.5 0.4

B 0.7 0.8

E(RM) = 0.25 (RM) = 0.75 RF = 0.06

(Ri, RM) denotes the correlation between the returns on security i and the returns on the market portfolio; (Ri) denotes the standard deviation of the returns on security i, E(RM) denotes the expected return on the market portfolio; (RM) denotes the standard deviation of the returns on the market portfolio; and RF denotes the risk-free rate of return.

(a) Calculate i (beta) for each of the following:

(i) Security A

(ii) Security B

(b) According to the Capital Asset Pricing Model (CAPM), what are the expected returns for securities A and B?

(c) Write down expressions for the characteristic lines for securities A and B. Draw sketches of the characteristic lines for securities A and B. Explain briefly how you would interpret the characteristic lines. 

(Word length for Q1C: 500 words)

(20 marks)

2. “In many respects, the APT is considered a general case of the CAPM”. With reference to the limitations of the CAPM, discuss this statement.

 (Word length for Q2: 800 words)

(50 marks)

3. With reference to specific factors, discuss how multifactor models perform in explaining individual security returns.

(Word length for Q3: 800 words)

(30 marks)