52) You are going to add one of the following three projects to your already wel

Question

52) You are going to add one of the following three projects to your already welldiversifi
ed portfolio.
robability Return Deviation Beta Probability Return Deviation
Beta
50% Chance 22% 12% 1.2 30% Chance 36% 19.5% 0.8
50% Chance -4% 40% Chance 10.5%
30% Chance -20%
PROJECT 3
Standard
Probability Return Deviation Beta
10% Chance 28% 12% 2.0
70% Chance 18%
20% Chance -8%
Assume the risk-free rate of return is 2% and the market risk premium is 8%. If
you are a risk averse investor, which project should you choose?
a. Either Project 2 or Project 3 because the higher expected return on
project 3 offsets its higher risk.
b. Project 2
c. Project 1
d. Project 3

Explanation / Answer

a. Either Project 2 or Project 3 because the higher expected return on project 3 offsets its higher risk

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