When using CAPM to determine a benchmark return against which to compare a proje

Question

When using CAPM to determine a benchmark return against which to compare a project?s IRR, you should

A) use the yield on a one-year Treasury security as your risk-free rate.

B) use the yield on a ten-year Treasury security as your risk-free rate.

C) use the yield on a Treasury security that most closely matches the duration of your

project as your risk-free rate.

D) use the yield on a three-month Treasury security as your risk-free rate.

A) use the yield on a one-year Treasury security as your risk-free rate.

B) use the yield on a ten-year Treasury security as your risk-free rate.

C) use the yield on a Treasury security that most closely matches the duration of your

project as your risk-free rate.

D) use the yield on a three-month Treasury security as your risk-free rate.

Explanation / Answer

Answer: Option "C" is correct that says, "Use the yield on a Treasury security that most closely matches the duration of your project as your risk-free rate"

If you use the yield on a treasury bill that is most close to the duration of your project, it will be more accurate and will give the best comparison.

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