QUESTION

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Suppose your production opportunity set in a world of perfect certainty consists of the following possibilities:

Project Investment Outlay Rate of Return %
A $1,000,000 8
B 1,000,000 20
C 2,000,000 4
D 3,000,000 30

a) Graph the production opportunity set in a C0, C1 framework.

b) If the market rate of return is 10%, draw in the capital market line for the optimal investment decision.


Suppose your production opportunity set in a world of perfect certainty consists of the following possibilities: \begin{tabular}{|c|c|c|} \hline Project & Investment Outlay & Rate of Return (\%) \\ \hline $\mathrm{A}$ & $\$ 1,000,000$ & 8 \\ \hline $\mathrm{B}$ & $1,000,000$ & 20 \\ \hline $\mathrm{C}$ & $2,000,000$ & 4 \\ \hline $\mathrm{D}$ & $3,000,000$ & 30 \\ \hline \end{tabular} (a) Graph the production opportunity set in a $c_{0}, c_{1}$ framework. (b) If the market rate of return is $10 \%$, draw in the capital market line for the optimal investment decision. (Copeland, Weston \& Shastri)

Public Answer

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