Account for the risk embodied in the new project

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Problem: Suppose you are evaluating a new project, costing 136 and yielding an expected payoff of 65 for the first year and 100 for the second year. you know that the market return is 0.09, that the covariance of the new investement's payoffs with the market portfolio is 0.2 and that the standard deviation of the market payoff is 0.4. You also know that the risk-free rate is 0.01. Would you accept the project if you did not account for the risk embodied in the new project? Why? What if you used a rate properly accounted for risk, obtained by using the CAPM?

Reference no: EM132440681

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