CONNECT WITH LEARNSMART FOR BODIE: ESSE
11th Edition
ISBN: 2819440196222
Author: Bodie
Publisher: MCG
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Chapter 7, Problem 1PS
Summary Introduction
To determine:
impact on required
Introduction:
Required return of the project is given by:
Required return = Risk free rate + Beta of the project* Market risk premium
Expert Solution & Answer
Explanation of Solution
Beta of the project = Covariance between the return of the project and market index portfolio/ Variance of the market index portfolio
Hence, an increase in the standard deviation of the portfolio is 50% will increase the Beta of the Google's investment project and its required rate of return.
Conclusion
Thus if the standard deviation of the market index portfolio increases by 50% then as per CAPM the required rate of return on Google's investment project will also rises.
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Chapter 7 Solutions
CONNECT WITH LEARNSMART FOR BODIE: ESSE
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