In the CAPM world investors measure the risk of a project that your firm chooses
ID: 2732164 • Letter: I
Question
In the CAPM world investors measure the risk of a project that your firm chooses to by its market beta standard deviation variance covariance with other project! m which you, firm invests Which of the following statements is true ? A assets with higher levels of market risk will sell for higher prices assets with lower levels of market risk will Kaw higher expected rates of return assets with higher levels of market will have lower expected rates of return assets with lower levels of market risk will sell for higher prices A Project has a market beta of 1.1. The risk free rate n 3%. and the equity is S.SV Your firm shock undertake this project only if It returns A greater or equal to 9.05% greater or equal to 6.5% greater or equal to 5% greater or equal to 8.5% You have $6000 invested In Security M. $3000 invested in Security L and $9000 invested * Security P. Security M has a bet a of 1.1; Security I has a beta of 0.9; and Security P has a beta of 2. The relevant risk -free rateExplanation / Answer
17.
The Beta or Market beta is the measure of risk of a project under CAPM model. Therefore, the correct option is A. Market beta.
18.
Assets with lower levels of market risk will sell for higher prices because investors look for more risk free investments. Therefore, the correct option is D.
19.
Let us calculate CAPM return as follows to answer the question.
CAPM return = Rf + (Rp) ×
= 3 + (5.5) ×1.1
= 9.05%
Therefore, project should be undertaken if return is more than or equal to 9.05%.
The correct option is A.
20.
Calculate the weighted beta.
1
2
3
4
5=3*4
Securities
Investments
Weights
Beta
Weighted Beta
M
$ 6,000
0.33
1.10
0.37
L
$ 3,000
0.17
0.90
0.15
P
$ 9,000
0.50
2.00
1.00
$ 18,000
1.52
CAPM return = Rf + (Rm-Rf) ×
= 3 + (8-3) × 1.52
= 10.6%
Therefore, the correct option is C. 10.6%
21.
The correct option is option D as it is generates 12% expected return which most closes to the market return of 10.6% mentioned in 20 above.
1
2
3
4
5=3*4
Securities
Investments
Weights
Beta
Weighted Beta
M
$ 6,000
0.33
1.10
0.37
L
$ 3,000
0.17
0.90
0.15
P
$ 9,000
0.50
2.00
1.00
$ 18,000
1.52