Clearinghouse Publications is adding a new magazine project to the company portfolio and has the following information: the expected market return is 12%,the risk-free rate is 4%,and the expected return on the new project is 20%.What is the beta of the project?

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 the formula to solve for beta gives: Beta = (Expected Return - Risk-Free Rate) / (Market Return - Risk-Free Rate). Substituting the given values: Beta = (20% - 4%) / (12% - 4%) = 16% / 8% = 2.00.

Clearinghouse Publications Is Adding a New Magazine Project to the Company