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    Solution:: R R R R R

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    Siddhant Dwivedi
    Wolff Enterprises must consider investment projects A through E using the CAPM model. The document provides information on the required rate of return and risk premium for each project based on their nondiversifiable risk. It also discusses drawing the security market line and the impact of declining investor risk aversion on required returns.

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    Solution:: R R R R R

    Uploaded by

    Siddhant Dwivedi
    48 views2 pages
    Wolff Enterprises must consider investment projects A through E using the CAPM model. The document provides information on the required rate of return and risk premium for each project based on their nondiversifiable risk. It also discusses drawing the security market line and the impact of declining investor risk aversion on required returns.

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    96-B-F-M-F (387)

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    Wolff Enterprises must consider investment projects A through E using the CAPM model. The document provides information on the required rate of return and risk premium for each project based on their nondiversifiable risk. It also discusses drawing the security market line and the impact of declining investor risk aversion on required returns.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    48 views2 pages

    Solution:: R R R R R

    Uploaded by

    Siddhant Dwivedi
    Wolff Enterprises must consider investment projects A through E using the CAPM model. The document provides information on the required rate of return and risk premium for each project based on their nondiversifiable risk. It also discusses drawing the security market line and the impact of declining investor risk aversion on required returns.

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
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    Wolff Enterprises must consider several investment projects, A through E, using the capital asset

    pricing model (CAPM) and its graphical representation, the security market line (SML).
    Relevant information is presented in the following table.

    .:.
    a. Calculate
    (1) The required rate of return and
    (2) The risk premium for each project, given its level of nondiversifiable risk.
    b. Use your findings in part a to draw the security market line (required return relative to
    nondiversifiable risk).
    c. Discuss the relative nondiversifiable risk of projects A through E.
    d. Assume that recent economic events have caused investors to become less risk averse, causing
    the market return to decline by 2%, to 12%. Calculate the new required returns for assets A
    through E, and draw the new security market line on the same set of axes that you used in part b.
    e. Compare your findings in parts a and b with those in part d. What conclusion can you draw
    about the impact of a decline in investor risk aversion on the required returns of risky assets?

    SOLUTION:

    a.
    Project rj  RF  [bj(rm  RF)]
    A rj  9%  [1.5(14%  9%)]  16.5%
    B rj  9%  [0.75(14%  9%)]  12.75%
    C rj  9%  [2.0(14%  9%)]  19.0%
    D rj  9%  [0(14%  9%)]  9.0%
    E rj  9%  [(0.5)(14%  9%)]  6.5%
    b. and d.

    c. Project A is 150% as responsive as the market.


    Project B is 75% as responsive as the market.
    Project C is twice as responsive as the market.
    Project D is unaffected by market movement.
    Project E is only half as responsive as the market, but moves in the opposite direction as
    the market.

    d. See graph for new SML.


    rA  9%  [1.5(12%  9%)] 13.50%
    rB  9%  [0.75(12%  9%)] 11.25%
    rC  9%  [2.0(12%  9%)] 15.00%
    rD  9%  [0(12%  9%)] 9.00%
    rE  9%  [0.5(12%  9%)] 7.50%

    e. The steeper slope of SMLb indicates a higher risk premium than SML d for these market
    conditions. When investor risk aversion declines, investors require lower returns for any
    given risk level (beta).

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