I. The fclhwirlg inrn’at’mn is available an the percentage rates of return on various assets under the three possible states of the world, each of

i) What is the numerical equation for the Capital Market Line (CML) for the market?

ii) Do shares A and B lie on the CML, and what, if anything, do you conclude from this?

iii) What are the beta values for share A and B?

iv) Are the expected returns for shares A and B consistent with the Security Market Line and, if not, what equilibrating changes would you expect to occur?

I. The fclhwirlg infirn’at’mn is available an the percentage rates of return on variousassets under the three possible states of the world, each of which has aprchahflfly of <1chng cfonethird: State 1 2 3Share A 45% -18% fifl%Share E 32% -22% 35%Market Portfoli) 50% – 10% 20%Rik-free Asset 1fl% 113% 1fl% flWhat’Ethemmzerical equation fisrthe Capital Marketline (CM)fiirthemarket?i1] Dc shares Aarldfllie unite CMJHI what, ifanythirlg, dcycu ccnchtde Ecru It’s? iii) Whatarethebetavahies fisrshareAandB? iv) Aretheexpected returns ficrshares Aand Bccnsistent with the Security Market Lire and, if mt. what equihhrating changs would you expect to occur?

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