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Sep 21 Paper A Q5 ii)

S

sophieactrainee

Keen member
Hi there,

I have a CAPM question.

We are asked to find the return on Risky Asset C. In solutions you can work this out by two methods, Market Capitilisation Approach and the Security Market Line approach. Both yield different answers, the former being x=12.5, and latter being x=17.

Am I correct in saying that in the solutions, they are allowing both answers? They do mention that if the CAPM assumptions really did hold correctly we'd have expected same answer? If I got this question in the exam, this would have confused me getting two solutions for x, as it did say CAPM held and yet getting two different solutions?

Thanks
 
Hi Sophie,

Yes, if there is an exam question with two different solutions resulting from different methods, you should get full marks regardless of the approach. It's disappointing when a question allows this because, really, the questions should be checked to make sure this sort of anomaly doesn't happen. You are right that if the CAPM assumptions really did hold correctly we'd have expected the same answer,

Good luck!
John
 
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