Bob's Discount Shoe Source 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?
A) 0.60
B) 0.70
C) 0.80
D) 0.90

Question

Quizplus · Accepted Answer

The beta of the project can be calculated using the Capital Asset Pricing Model (CAPM) formula: Expected Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). Rearranging to solve for Beta gives: Beta = (Expected Return - Risk-Free Rate) / (Market Return - Risk-Free Rate) = (11% - 3%) / (13% - 3%) = 0.80.

Bob's Discount Shoe Source Is Adding a New Line of Shoes