Where will the following projects plot in relation to the security market line i

Question

Where will the following projects plot in relation to the security market line if the risk-free rate is 6% and the market risk premium is 9%? Which projects should be undertaken

Project

Beta

IRR

A

2.0

25%

B

1.6

22%

C

1.1

15%

D

0.8

11%

  

Project

     

Beta

     

IRR

     

A

     

2.0

     

25%

     

B

     

1.6

     

22%

     

C

     

1.1

     

15%

     

D

     

0.8

     

11%

   Where will the following projects plot in relation to the security market line if the risk-free rate is 6% and the market risk premium is 9%? Which projects should be undertaken

Explanation / Answer

Since Project A & Project B s alpha is positive , both project A & B should be undertaken if there is sufficient fund available

But if to choose among 4 project than choose Project B which is higher alpha

Project Beta IRR Required Rate Of return = Rf + Beta * Risk premium Alpha =IRR - Required rate of return A 2 25% 24.00% 1.00% B 1.6 22% 20.40% 1.60% C 1.1 15% 15.90% -0.90% D 0.8 11% 13.20% -2.20%

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