## Answers

beta=1.5 Rf=7% Rm=10% E(R)=11%

a)

If rm increases by 10% then new Rm=10%*(1+10%)=11%

Required return=7+1.5*(11-7)=13%

If rm decreases by 10% then new Rm=10%*(1-10%)=9%

Required return=7+1.5*(9-7)=10%

b)Required Return= Rf+Beta*(Rm-Rf)

=7%+1.5*(10-7)=11.5%

c)We will not recommend this investment as the actual return is less than the required return by 0.5%

d)if Rm=9%

Required return=7+1.5*(9-7)=10%

and now we can go ahead with the investment as the actual return is more than the required return by 1%

.We can use CAPM model to analyze above situation.

Return_{Investment} = RiskFreeRate + Beta*(R_{m} - RiskFreeRate) ...(1)

Given, RiskFreeRate = 7%, Beta = 1.5 ...(2)

From (1) & (2),

Return_{Investment} = 7% + 1.5*(R_{m} - 7%)

**When R _{m}=10%**

Return_{Investment} = 7% + 1.5*(**10%**- 7%) = 11.5% (nearer to 11% as given in question)

**If R _{m} to increase 10%, R_{m} = 10%*1.1 = 11%**

Return_{Investment} = 7% + 1.5*(**11%**- 7%) = **13%.** {we expect investment's return to increase **to** 13%}

**If R _{m} to fecrease 10%, R_{m} = 10%*0.9 = 9%**

Return_{Investment} = 7% + 1.5*(**9%**- 7%) = **10%.** {we expect investment's return to decrease **to** 10%}