Chapter 1 - f ) r = 0.04 + [0.8 (0.12 0.04)] = 0.104 =...

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Chapter 9 15. a. b. Market risk premium = r m – r f = 0.12 – 0.04 = 0.08 = 8.0% c. Use the security market line: r = r f + β (r m – r f ) r = 0.04 + [1.5 × (0.12 – 0.04)] = 0.16 = 16.0% d. For any investment, we can find the opportunity cost of capital using the security market line. With β = 0.8, the opportunity cost of capital is: r = r f + β (r m – r
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Unformatted text preview: f ) r = 0.04 + [0.8 (0.12 0.04)] = 0.104 = 10.4% The opportunity cost of capital is 10.4% and the investment is expected to earn 9.8%. Therefore, the investment has a negative NPV. e. Again, we use the security market line: r = r f + (r m r f ) 0.112 = 0.04 + (0.12 0.04) = 0.9...
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This note was uploaded on 11/09/2010 for the course FINC 2012 taught by Professor Andrew during the Three '10 term at University of Sydney.

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