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Question - You are considering investing in four shares in the equity markets and after careful consideration and analysis, you have decided on Abax Ltd, Baxter Ltd, Crazy Ltd and Densa Ltd. The expected market return is 13% and the risk-free rate is 8%. You want to use the CAPM to estimate the required rate of return for the three shares. The beta for each share is as follows:
Share
Beta
Abax Ltd
0.33
Baxter Ltd
0.75
Crazy Ltd
1.00
Densa Ltd
1.25
(a) What is the required return for investing in each of these shares?
(b) If the risk-free rate increases from 8% to 11%
i. How would this change the intercept point of the capital market line with the efficiency frontier?
ii. How would it change the slope of the securities market line?
iii. What securities would you prefer in times when interest rates are rising and conversely if interest rates are falling?
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