What is the highest possible beta estimate for the project before is NPV becomes negative (given that the project IRR is equal 19.5%)?

PART I. True, False, or Uncertain?

1. The Capital Asset Pricing Theory concludes that all investors optimize according to the Markowitz Portfolio Selection Model invest in the minimum variance portfolio.
2. The security market line graphs the individual asset risk premiums as a function of asset risk (beta).
3. If the alpha of a security is positive, we should buy this security only if the expected

PART II.

4. Consider the following table. Which gives a security analysts expected return on two stocks for tow particular market returns:

Market return Aggressive stock Defensive stock
5% -5% 6%
25% 30% 10%

a. What are the betas of the stocks?
b. What is the expected rate of return on each stock if the market return is equally likely to be 5% and 25%

c. If the T-bills rate is 6% and the market return is equally likely to be 5% or 25% draw the SML for this economy and plot the two securities on the SML graph. What are the alpha of each?

5. What must be the beta of a portfolio with , if and ?

6. You are consultant to a large corporation that is considering a project with the following net after tax cash flows (in millions of dollars)

Years from Now After tax cash flow
0 -40
1-5 25
The project beta is 1.5 assuming that and .
1. What is the net present value (NPV) of the project?
2. What is the highest possible beta estimate for the project before is NPV becomes negative (given that the project IRR is equal 19.5%)?

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