2. Assume that the Treasury bill rate is 3 percent and the expected return on the market portfolio is 9 percent. Your firm is considering the following investment projects. Project Beta Actual Expected Return A 0.5 .08 -0.5 .01 C 1.8 .12 A. In a top-level meeting of the firm's capital budgeting department, a financial analyst named Dozy Fizdorp states that "the firm should undertake only those projects having an actual expected return (i.e., predicted internal rate of return) that exceeds the expected market portfolio rate of return of 9 percent. Therefore, the firm should accept project C and reject projects A and B." The Chief Executive Officer then turns to you and asks whether you agree or disagree with Mr. Fizdorp. What is your response? Explain your reasoning. If you disagree, recommend a better investment strategy and explain.

2. Assume that the Treasury bill rate is 3 percent and the expected return on the market portfolio is 9 percent. Your firm is considering the following investment projects. Project Beta Actual Expected Return A 0.5 .08 -0.5 .01 C 1.8 .12 A. In a top-level meeting of the firm's capital budgeting department, a financial analyst named Dozy Fizdorp states that "the firm should undertake only those projects having an actual expected return (i.e., predicted internal rate of return) that exceeds the expected market portfolio rate of return of 9 percent. Therefore, the firm should accept project C and reject projects A and B." The Chief Executive Officer then turns to you and asks whether you agree or disagree with Mr. Fizdorp. What is your response? Explain your reasoning. If you disagree, recommend a better investment strategy and explain.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter11: Capital Budgeting And Risk

Section: Chapter Questions

Problem 7P

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