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Assume that the risk-free rate of return is 6 percent and

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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)

A

4

2

5

B

2

6

12

C

10

15

20

D

-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?

Reference no: EM13573751

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