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    Investment Management

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    Please provide concise answers in 4 to 5 sentences for the following questions.

    1) Would you ever use CAPM to make personal investment decisions?

    2) What is your personal discount rate or rate of preferences? i.e. how much would you pay for a promise of $1000 to be received one year from now? Would you discount it by 10%, 5%, etc?

    3) How accurate do you think a company's estimates of the net present value of a proposed project are?

    4) Many of the small "dot-com" companies got financing in the form of an instrument called convertible debt. This is like ordinary debt, in that it pays a regular interest amount. But debtholders have the right to convert it to equity.
    Why do you think these companies chose this instrument? Do you think it was a good idea?

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    Solution Preview

    The response addresses the queries posted in 706 words with references.

    //Before describing about the use of CAPM to make personal investment decisions, it is crucial to have knowledge about the intrinsic value of a capital asset. One should know about the components of rate of return for effective analysis of CAPM//

    1) Would you ever use CAPM to make personal investment decisions?

    The intrinsic value of a capital asset is the present value of the expected future cash flows discounted at the required rate of return (Re) consists of three components:

    1. Risk free real rate.

    2. Inflation premium

    3. Risk premium

    The first two components are collectively called the risk free nominal rate denoted by Rf. The risk premium depends on the level of risk and the compensation per unit of risk. In an efficient market, investors hold diversified portfolio where the unsystematic risk is negligible. So they only need compensation for systematic risk measured in terms of β. The market portfolio is defined to have a ...

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