Question

a. According to CAPM, the expected return on a risky asset depends on three components. Describe each component and explain its role in determining expected return. b. Explain the difference

between systematic and unsystematic risk. Also explain why one of these types of risks is rewarded with a risk premium while the other type is not. c. The beta of a new machine is 1.2, and it gearing ratio (debt to equity) is 0.2.The tax rate is 30%, risk free rate is 5%, and market risk premium is 8%. What is the project cost of equity (COE)? i. Calculate the expected return, variance and standard deviation for the two equities: (a) a risk adverse investor (b) a risk loving investor

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