Question: QUESTION 4 The relationship between risk and return plays an important role in corporate finance; and finance managers must not only understand this relationship but

QUESTION 4 The relationship between risk and return plays an important

QUESTION 4 The relationship between risk and return plays an important role in corporate finance; and finance managers must not only understand this relationship but how to mitigate risk where possible. Required: (a) Explain with examples what is measured by Beta. [3 Marks) (b) Explain why risk may continue to exist despite diversification. [3 marks] (c) Explain if diversification of a company's investments would yield any benefit to its shareholders. [4 Marks] (d) Discuss how using CAPM instead of WACC can lead to a better investment decision in investment appraisal. Provide examples using the SML. [12 Marks] (e) Explain how hedging interest rate risk can reduce the required rate of return to debt holders. [3 marks) [Total 25 Marks]

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