Question 2. (50 marks] In a CAPM world, assume that both the risk free rate and the market premium are 5% per year. a. Draw the Security Market Line. Briefly discuss why a security's beta is a better measure of its risk than the standard deviation of its returns. b. A private equity outfit is considering whether to acquire a stake in any of the following fully equity financed listed companies. Each stake is expected to be sold after one year. The costs of each position, the estimated proceeds from the sale and the betas of each company are given in the table below. Company Cost Expected proceeds Beta from sale next year 1 20m 24m 1 2 40m 46m 3 60m 80m 4 Compute the internal rate of return (IRR) for each project and identify the points corresponding to each project on your diagram. Assuming that the projects are not mutually exclusive, which one(s) would you advise to take? C. Suppose now that the private equity firm estimates its own beta to be equal to 4 and its cost of capital to be 25%. The firm's CFO thus encourages undertaking only projects with an IRR above 25%. Would this approach be correct? Give reasons for your answer. Question 2. (50 marks] In a CAPM world, assume that both the risk free rate and the market premium are 5% per year. a. Draw the Security Market Line. Briefly discuss why a security's beta is a better measure of its risk than the standard deviation of its returns. b. A private equity outfit is considering whether to acquire a stake in any of the following fully equity financed listed companies. Each stake is expected to be sold after one year. The costs of each position, the estimated proceeds from the sale and the betas of each company are given in the table below. Company Cost Expected proceeds Beta from sale next year 1 20m 24m 1 2 40m 46m 3 60m 80m 4 Compute the internal rate of return (IRR) for each project and identify the points corresponding to each project on your diagram. Assuming that the projects are not mutually exclusive, which one(s) would you advise to take? C. Suppose now that the private equity firm estimates its own beta to be equal to 4 and its cost of capital to be 25%. The firm's CFO thus encourages undertaking only projects with an IRR above 25%. Would this approach be correct? Give reasons for your