Question 1:

(i) State and explain the Capital Asset Pricing Model (CAPM).

(ii) Discuss the resiliency of the model when the assumptions under which the CAPM is derived are relaxed?

(iii) Explain the Arbitrage Pricing Theory. In what ways the Arbitrage Pricing Theory is considered to be a superior model.

Question 2:

(a) Derive and explain the Capital Market Line. Make and state all necessary assumptions.

(b) How would you evaluate the performance of a fund manager? Enumerate the practical difficulties you might encounter in your task?

Question 3:

(a) Enumerate and explain the axioms of cardinal utility.

(b) Using a world of a two risky assets, derive the minimum variance portfolio.

(c) Describe the joint hypothesis dilemma and the Roll critique. In what sense are they related and in what sense are they different?

Question 4:

(a) Explain clearly how you would test for three major stock market anomalies in the finance literature on the Stock Exchange of Mauritius. What explanations have been put forward to explain these anomalies.

(b) Distinguish fully between the Capital Market Line and the Security Market Line.

Question 5:

(a) Explain clearly a weak form test, a semi-strong form test and a strong form test of the Efficient Market Hypothesis (EMH).

(b) Discuss the competing theories underlying the term structure of interest.