1. Shell's stock price jumped when it announced that it discovered a large oil field in the Gulf of Mexico. This is an example of
A. Market risk
B. Unsystematic risk
C. Systematic risk
D. Undiversifiable risk
2. You are the CFO of a major pharmaceutical firm. A division manager has presented senior management with an investment opportunity.
The project would require an investment of $95 million today
If the project succeeds, it will be worth $1 billion in a year. You estimate that there is only a 10% chance that the venture would succeed. If it fails, then in a year you will scrap the project and all of your firm’s $95 million investment will be lost.
Whether the venture succeeds or fails is independent of general market conditions.
The risk-free rate is 3%, the expected return of the market is 12%, and the standard deviation of the market return is 20%. Ignore taxes.
What is the beta of the project? What is the appropriate discount rate for the project under the assumptions of CAPM?
A. 0 ; 3%
B. 1 ; 15%
C. 1 ; 12%
D. 0 ; 20%