Integrative—Risk, return, and CAPM Wolff Enterprises must consider one investment project using the capital asset pricing...
Integrative—Risk, return, and CAPM Wolff Enterprises must consider one investment project using the capital asset pricing model (CAPM). Relevant information is presented in the following table.
|
Item |
Rate of return |
Beta, b |
||
|
Risk-free asset |
9% |
0.00 |
||
|
Market portfolio |
15% |
1.00 |
||
|
Project |
1.13 |
|||
a. Calculate the required rate of return for the project, given its level of nondiversifiable risk.
b. Calculate the risk premium for the project, given its level of nondiverisifiable risk.
a. The required rate of return for the project is _____%. (Round to two decimal places.)
b. The risk premium for the project is ______%. (Round to two decimal places.)
Homework Answers
a. Required rate of return as per CAPM =
=Risk Free Rate + (Market Return - Risk Free Rate) * Beta
= 9 % + ( 15% - 9%) * 1.13
= 15.78%
Hence, the correct answer is :
The required rate of return for the project is 15.78%
b. Risk Premium = Market Return - Risk Free rate
= 15% -9%
= 6%
Hence, the correct answer is :
The risk premium for the project is 6.00%
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Integrative—Risk,
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