Question

Magellan is adding a project to the company portfolio and has the following​ information: the expected market return is 11.6​%, the​ risk-free rate is 3.6​%, and the expected return on the new project is 15.4​%. What is the​ project's beta?

Answer 1

The beta of the new project is 1.475

Step-by-step explanation:

The beta is the measure of systematic or market risk associated to a stock. The beta is used in the calculation of the required/expected rate of return under the CAPM model. The CAPM model uses the following formula to calculate the required/expected rate of return,

r = rRF + Beta * (rM - rRF)

Plugging in the available variables, we can calculate the value of the beta.

0.154 = 0.036 + Beta * (0.116 - 0.036)

0.154 - 0.036 = Beta * 0.08

0.118 / 0.08 = Beta

Beta = 1.475