a. Explain how the CAPM beta of a stock is estimated. [3 marks] b. Do betas of a share estimated using intraday, daily and monthly returns generally differ? Explain briefly. [5 marks] C. Explain the assumptions and implications of the "One Fund Separation theorem. [7 marks] d. You have been researching an AAA (ie very low risk of default) 10-year corporate bond which you believe is trading cheaply. You expect the bond to have a return of 7.5% per annum, while the comparable 10-year Treasury bond has an expected return of 6%. The annual volatility of the corporate bond is 6.5% and that of the Treasury bond is 6%; the correlation between them is 0.95. You can borrow or lend short term at the Treasury bill rate of 5.4%. Required: (i) Supposing that you want to construct a levered portfolio consisting of the corporate bond and the treasury bond, design the portfolio that has an expected return of 40% and minimum risk. [12 marks] (ii) What is the volatility of the optimal portfolio? [3 marks] (iii) If the correlation between the corporate and treasury bonds turns out to be 0.8 rather than the 0.95 you had assumed, and the portfolio composition is as estimated in (i), would you expect the volatility of the portfolio to be different from your answer in (ii)? Explain briefly. [3 marks] TOTAL 33 MARKS