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Oakwood University Wolff Enterprise Managerial Finance Questions

Oakwood University Wolff Enterprise Managerial Finance Questions

Question Description

Integrative: Risk, return, and CAPM Wolff Enterprise 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.

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ItemRate of returnBeta, B

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Risk-free asset9%0.00

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Market portfolio141.00

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Project A-1.50

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Project B-0.75

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Project C-2.00

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Project D-0.00

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Project E–0.50

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  • 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 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 by 2%, to 12%. Calculate the new required returns for assets A through E, and draw the new security market line on the same set of axes that used in part 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?
  • Please provide complete answers and please show how you arrived at that answer, thanks so much!!

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