Grimmond must consider several investment projects, A to E, using the CAPM and its graphic

representation, the SML. Use the table below to answer the questions that follow it.

Required:

a) Calculate the required return and risk premium for each project, given its level of non-diversifiable risk.

b) Use your findings in part a to draw an SML (required return relative to non-diversifiable risk).

c) Discuss the relative non-diversifiable risk of projects A to E.

d) Assume that recent economic events have caused investors to become less risk-averse, causing the market return to decline by 2% to 12%. Calculate the new required returns for assets A to E and draw a new SML on the same set of axes used in part b .

e) Compare your findings in part a and b to those in part d. what conclusion can be drawn about the impact of a decline in investor risk aversion on the required returns of risky assets.