Assume you are a manager of a corporation in Canada that has only investors from the U.S. You are considering investing in a Brazilian operation. To determine the beta of your project,
You should

Question

Quizplus · Accepted Answer

As the investors are from the U.S., it is important to determine how the Brazilian project covaries with the U.S. stock market. Beta measures the sensitivity of an asset's returns to the returns of a benchmark, in this case, the U.S. stock market would be the appropriate benchmark for the U.S. investors. Since the corporation has only investors from the U.S., it is appropriate to determine the beta of the project with respect to the U.S. stock market. The beta will help assess the level of systematic risk associated with the Brazilian project and determine the appropriate cost of capital for the investment. Option A assesses the covariance of the project with the Canadian stock market, which is not relevant in this scenario. Option C assesses the covariance of the project with the Brazilian stock market, which is not applicable here since the investors are from the U.S. Option D is not directly related to determining the beta of the Brazilian project.

Assume You Are a Manager of a Corporation in Canada