Question

Penney Fashions is adding a new line of shoes to the company portfolio and has the following information: the expected market return is 13%, the risk-free rate is 3%, and the expected return on the new project is 11%. What is the beta of the project?

Answer 1

Answer:

0.80

Explanation:

Based on the Capital Asset Pricing Model(CAPM), the formula for determining the expected return on the project stated below can be used to determine the beta of the project, whereby the formula is rearranged such that the project beta is made the subject of the formula:

expected return=risk-free rate+beta*(market return-risk-free rate)

expected return on the project=11%

risk-free rate=3%

beta=the unknown

market return=13%

11%=3%+beta*(13%-3%)

11%=3%+beta*10%

11%-3%=beta*10%

8%=beta*10%

beta=8%/10%=0.80