Problem
The Australia North Expressway (ANE) Project is a joint venture between five major international companies.
It is operated by Stamford-Raffles Consortium (ASX:SRC), and is Australia's largest oil and gas development.
ANE is concerned that a major cyclone could disrupt its pipelines, which run 700 kilometres off the coast of Western Australia.
In the event of a disruption, the project anticipates a loss of profits of $65 million. Suppose the likelihood of a disruption is 3% per year, and the beta associated with such a loss is -0.25. If the risk-free interest rate is 5% and the expected return of the market is 10%.
Task
i. What is the actuarially fair insurance premium?
ii. Describe relationship between Security Market line and Standard deviation and Capital Asset Pricing Model.