Calculate the required rate of return & the risk premium
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a. Calculate (1) the required rate of return and (2) the risk premium for each project, given its level of nondiversifiable risk. b. Use your findings in part a to draw the security market line (required rate of return relative to nondiversifiable risk) c. Discuss the relative nondiversifiable risk of projects A through E. d. Assume that recent economic events have caused investors to become less risk-averse, causing the market return to decline to 12%. Calculate the new required returns fcor assets A through E and draw the new security market line on the same graph you drew for b. e. 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?
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