Question $3$

Roberto Enterprises is concerned that exporting to South East Asia will impact on its share price and is seeking a full analysis of the determinants of share price. At the moment the company has a risk return rating on its shares of $15\mathrm{.}5\%,$ determined by using a beta factor of $1\mathrm{.}25.$ The risk free rate is $5\mathrm{.}5\%.$

Required:

a$)$ What is the risk premium for Roberto Enterprises? $10\%$

b$)$ What is the market risk premium? $8\%$

c$)$ Give

i$)$ Two examples of market risk Interest Rate., Oil prices

ii$)$ Two examples of individual risk CEO dismissed, Legal action

d$)$ What risk is measured by beta? Explain your answer. Systematic Risk

e$)$ What does a beta of $1\mathrm{.}25$ inform shareholders about the risk of Roberto Enterprises? Explain your answer. More riskier than the market

f$)$ Should shareholders be compensated for bearing the total risk associated with the returns of the individual company? No $-$ principle of diversification

g$)$ Plot Roberto Enterprises and the market portfolio using a SML diagram $($Security Market Line Diagram$).$ Draw a SML diagram and identify the position of

i$)$ Roberto Enterprises

ii$)$ Market portfolio

iii$)$ Risk Free Rate

Label your axes.