Question

g You are considering Project A, with the following information (Assume all statistics given are correct): Economy Probability of Rates of Return ____ Condition State Occurring Project A Market T-Bill Bad 0.2 3% 0% 3% Good 0.8 15% 10% 3% Expected return 12.6% 8.0% 3% Standard deviation 6.0% 5.0% 0% Correlation Coefficient between Project A and Market

Answer 1

Beta for Project A = 1.2

Project A is a very good investment as the Sharpe Ratio of Project A (1.6) is greater than the Sharpe Ration of the Market (1).

Step-by-step explanation:

Find the beta for Project A and evaluate Project A.

We will also confirm if Project A is a good investment and the reason will be stated.

1)

Beta = (Correlation × Standard deviation of Project A) / Standard deviation of Market

Beta = 1 × 0.06 / 0.05

Beta = 1.2

A beta of greater than 1 indicates that the security's price is theoretically more volatile than the market.

Project A's beta is 1.2, it is theoretically 20% more volatile than the market.

Sharpe ratio = (Expected return - Risk free rate) / SD

Sharpe ratio for project A = ( 12.6% - 3% ) / 6 = 1.6

Sharpe ratio for Market = ( 8% - 3% ) / 5 = 1

Project A is a very good investment as the Sharpe Ratio of Project A (1.6) is greater than the Sharpe Ration of the Market (1).