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MIDDLESEX UNIVERSITY
TEST 2
March, 2021
Module Number: FIN3120
Module Name: BUSINESS FINANCE
Module Leader: Dr. Jekaterina Kartasova
(Student Name, Surname, Student Nr.)
TIME: 1,5 H
OPEN BOOK TEST: NO LAPTOPS, USE YOUR CALCULATOR
TOTAL: 50 MARKS =10% OF YOUR FINAL GRADE
QUESTION 1
Let’s say that the current risk free-rate is 1.5%, and the S&P 500 is expected to return 7.3 %
next year. You are interested in determining the return that BroadWay Inc (BW) will have
next year, assuming that its beta value is 1.5.
Required
a) Using Capital Asset Pricing Model (CAPM), calculate Expected rate of return of
BroadWay Inc (BW). (5 marks)
b) Name basic Capital Asset Pricing Model (CAPM) assumptions (5 marks) and explain
if they are realistic/ not realistic and why (5 marks). TOTAL: 15 MARKS
ANSWER)
A) Expected Rate of return = = krf + j(km – krf = 1.5 + 1.5(7.3-1.5) = 10.2
b) Regardless of the way that CAPM’s suspicions are unmistakably unreasonable, such
improvement of the fact of the matter is routinely imperative to make important models. The
certified preliminary of a model falsehoods not just in the reasonableness of its principal
suspicions yet what’s more in the authenticity and supportiveness of the model’s answer.
Strength of CAPM’s suspicions, at any rate unusual, grants the surmising of a strong, anyway
romanticized, model of the path in which cash related business sectors measure danger and
change it into expected return. At the center of the model are its secret presumptions, which
numerous denounce as being unreasonable and which may give the reason to a part of its
huge drawbacks. No model is incredible, yet each should have a couple of qualities that make
it accommodating and material.
(I) Risk-reluctant monetary experts will reliably have to have a fair proportion of their money
in by and large safe hypotheses, for model, cash and cash reciprocals. The supposition that is
reasonable in that they make them expand in their advantages.
(ii) Maximizing the utility of terminal wealth. The supposition that is an unreasonable
segment of the utility of use model in light of predestined future. Examination show that this
flaw can be restored by considering perseverance probabilities in expecting the utility of
future usage. They apply this methodology unequivocally to surrendered individuals with no
enrichment reasoning and no future pay, so the ability to be supported becomes:
(iii) Identical time horizon; the CAPM relies upon the suspicion that all monetary experts have
