P830 Integrative: Risk, return, and CAPM Wolff Enterprises must consider several investment projects, A through E, using

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P8–30 Integrative: Risk, return, and CAPM 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.

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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 riskaverse, 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?

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Related Book For  book-img-for-question

Principles Of Managerial Finance

ISBN: 9780133546408

7th Edition

Authors: Lawrence J Gitman, Chad J Zutter

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