Question

According to the capital asset pricing model (CAPM), a capital budgeting project that has a beta equal to zero should be evaluated using a required rate of return equal to the risk-free rate. a. True b. False

Answer 1

Answer:

a. True

Explanation:

from the CAPM formula we can derive the statemeent as true.

$Ke= r_f + \beta (r_m-r_f)$

risk free = 0.05

market rate = 0.12

premium market = (market rate - risk free) 0.07

beta(non diversifiable risk) = 0

$Ke= 0.05 + 0 (0.07)$

Ke 0.05000

As the beta multiplies the difference between the market rate and risk-free rate a beta of zero will nulify the second part of the equation leaving only the risk-free rate. This means the portfolio is not expose to volatility