Projects A and B, of equal risk, are alternatives for expanding Rosa Company's capacity. The firm's cost of capital is 13%. The cash flows for each project are shown in the following table.

			Project A		Project B
			-$130,000.00		-$85,000.00
Initial Investment (CF0)
Year (t)			Cash Inflows (CFt)
1			$25,000		$40,000
2			$35,000		$35,000
3			$45,000		$30,000
4			$50,000		$10,000
5			$55,000		$5,000

Question B

If the return on the market portfolio increased by 12%, what change would you expect in return for each stock?

Question C

If the return on the market portfolio decreased by 5%, what change would you expect in return for each stock?

Question D

If you believed the stock market was getting ready to experience a significant decline, which stock would you probably add to your portfolio? Why?

Question E

If you anticipated a major stock market rally, which stock would you add to your portfolio? Why?