QUESTION 1a Applications of capital asset pricing model (CAMP) Pricing of securities CAPM is used to determine whether financial assets are over-valued, under-valued or correctly priced by the market forces. This is the basis upon which to decide whether to buy or sell securities at prevailing market forces. Investment decisions CAPM is applied to determine the discounting rate used to evaluate capital investments. It is also used to determine the risk adjusted discounting rate. Cost of capital CAPM is used to determine the cost of capital, that is, the cost of equity capital, debt capital and the firm’s overall cost of capital. Evaluate portfolios CAPM is used to evaluate portfolios with a view to establish whether portfolios are profitable or unprofitable. It is thus applied to evaluate whether to change the composition of a portfolio or not. Efficiency of portfolio CAPM is used to determine which portfolios are super-efficient, inefficient or efficient. Evaluate performance of portfolios CAPM is applied to evaluate performance of portfolios. The Trenors measure of portfolio performance is based on the background of CAPM