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CAPM and Capital Budgeting Decision. The Taylor Corporation is evaluating some new capital budgeting projects. Their evaluation method involves comparing each project's risk-adjusted return obtained from the capital asset pricing model (CAPM) with the project's average rate of return. The following data are provided:
Projects
Beta
A
- 0.5
B
0.8
C
1.2
D
2.0
Possible rates of return and associated probabilities are:
Rates of Return (%)
(0.4)
(0.5)
(0.1)
4
2
5
6
12
10
15
20
-8
25
50
Assume that the risk-free rate of return is 6 percent and the market rate of return is 12 percent. Which projects should be selected?
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