QUESTION 5 R:+b,×(m-R1 kA=0.08[14×(0.140.08 =0.08+0.084 0.164r16.4% kB=0.08[1.15(0.140.08 0.080.069 0.14r14.9% 5.3%when a share of its level of systematic risk should be giving a retum or 10. 4 yL Share a is OVERVALUED- it is giv ing a return(at its current market price)of onl Share B is UNDERVALUED-it is giving a return(at its current market price)of 24.2% compared with a required return(given its systematic risk)of 14.9% No one will buy Share A as it is overpriced. Eventually its market price will drop so as to provide the investor with a return that is commensurate with its level of risk On the other hand, demand for Share B will be high as it is giving an excess return This demand will push the share price up. With the market price increasing, the return will drop to 14.9%so that the share will again plot on the SML 05.08.02July 2003 QUESTION 5 a)  ( ) j F j m R F k = R + b  k -  ( )  ( ) = 0 .1 4 9o r 1 4 .9 % = 0 .0 8+ 0 .0 6 9 k = 0 .0 8+ 1 .1 5 0 .1 4- 0 .0 8 = 0 .1 6 4o r 1 6 .4 % = 0 .0 8+ 0 .0 8 4 k = 0 .0 8+ 1 .4 0 .1 4- 0 .0 8 B A   c) Share A is OVERVALUED - it is giving a return (at its current market price) of only 5.3% when a share of its level of systematic risk should be giving a return of 16.4%. Share B is UNDERVALUED - it is giving a return (at its current market price) of 24.2% compared with a required return (given its systematic risk) of 14.9%. d) No one will buy Share A as it is overpriced. Eventually its market price will drop so as to provide the investor with a return that is commensurate with its level of risk. On the other hand, demand for Share B will be high as it is giving an excess return. This demand will push the share price up. With the market price increasing, the return will drop to 14.9% so that the share will again plot on the SML. 05.08.02