finance question

timer Asked: Jan 23rd, 2021

Question Description

I'm working on a finance question and need an explanation to help me understand better.

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


Risk-free asset9%0.0

Market portfolio14%1.0

Project A-1.5

Project B-0.75

Project C-2.00

Project D-0.0

Project E--0.50

  • Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk.
  • Use your findings in part a to draw the security market line (required rate of return relative to nondiversifiable risk)
  • Discuss the relative nondiversifiable risk of projects A through E.
  • Assume that recent economic events have caused investors to become less risk-averse, causing the market return to decline to 12%. Calculate the new required returns fcor assets A through E and draw the new security market line on the same graph you drew for b.
  • 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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