Npv of the venture to a diversified investor

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Reference no: EM131500741

You are considering a two-year venture that will cost £1.5 million and yield an expected cash flow of £3.2 million. The standard deviation of the expected cash flow is £2 million. Suppose that the expected market return is 13.5 percent per year, the risk-free rate is 7 percent per year, the market variance is 4 percent per year, and the correlation between the venture and the market is 0.2.

(a) Use the CEQ form of the CAPM to find the NPV of the venture to a diversified investor.

(b) Use your answer in part (a) to find the equilibrium standard deviation of holding period returns and then use the RADR form of the CAPM to find the NPV to a diversified investor.

(c) Use the CEQ form of the CAPM-based model to find the NPV of the venture as a full commitment.

(d) Use your answer in part (c) to find the equilibrium standard deviation of holding period returns and then use the RADR form of the CAPM-based model to find the NPV of the venture as a full commitment.

Reference no: EM131500741

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