Roberto Enterprises is concerned that exporting to South East Asia will impact on its
share price and is seeking a full analysis of the determinants of share price. At the
moment the company has a risk return rating on its shares of 15.5%, determined by
using a beta factor of 1.25. The risk free rate is 5.5%.
Required:
a) What is the risk premium for Roberto Enterprises? 10%
b) What is the market risk premium?8%
c) Give
i) Two examples of market risk Interest Rate., Oil prices
ii) Two examples of individual risk CEO dismissed, Legal action
d) What risk is measured by beta? Explain your answer. Systematic Risk
e) What does a beta of 1.25 inform shareholders about the risk of Roberto
Enterprises? Explain your answer. More riskier than the market
f) Should shareholders be compensated for bearing the total risk associated with
the returns of the individual company? No – principle of diversification
g) Plot Roberto Enterprises and the market portfolio using a SML diagram (Security
Market Line Diagram). Draw a SML diagram and identify the position of
i) Roberto Enterprises
ii) Market portfolio
iii) Risk Free Rate
Label your axes.
1 1.25 Risk