a) Briefly explain three practical uses of the capital asset pricing model ( 6 Marks)
b) Mr. Wetu is currently holding a portfolio consisting of shares of four companies quoted at
the Bahati stock exchange as follows:
4
Company No. of shares held Beta equity co-efficient Market expected return
Price per on equity in
Share the next year
%
A 20,000 1.12 65 18
B 30,000 0.89 50 23
C 30,000 0.70 45 11
D 20,000 1.60 80 17
The current Market return is 14% per annum and the treasury bills yields is 9% per annum.
Required
i) Calculate the risk of Wetu portfolio relative to that of the Market (5 Marks)
ii) Explain whether or not Wetu should change the composition of his portfolio (9 Marks)
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