This question relates to the Capital Asset Pricing Model (CAPM)
Fresh Fysh Ltd owns shares in four different companies, as set out below, and -based on their current share prices - expects the following returns.
Company Name Expected Return (%) Beta
Prawn Ltd 10.8% 0.5
Salmon Ltd 13.0% 0.8
Shark Ltd 15.6% 1.2
Trout Ltd 17.4% 1.7
The risk free rate of interest is currently 6% and the market risk premium is 8%.
i) Based on the CAPM, which of the above shares are undervalued, overvalued or correctly valued on the share market? Show all calculations and reasons for your answers.
ii) Using the above information, draw a Security Market Line graph, and plot all securities on the chart.