The CFO of Medi Search plc believes that investing into a project which will develop a new drug for fighting the flu virus, promises a long-term annual return of 10%. The expected return of the market index is RM= 11.2%, the volatility of the market index is σM= 10.7%, and the risk-free asset earns Rf= 4.5%. The CFO has studied similar projects of other companies and believes that the covariance between the returns of this project and the returns of the market is σP,M= 0.0063 (in decimal form). 1. What is the beta of the project? Enter your answer rounded to two decimal places. 2.According to the CAPM, what should be the required return of the project given its beta of 0.64? Enter your answer rounded to two decimal places. 3. Should the CFO accept the project? (Yes or No)
The CFO of Medi Search plc believes that investing into a project which will develop a new drug for fighting the flu virus, promises a long-term annual return of 10%. The expected return of the market index is RM= 11.2%, the volatility of the market index is σM= 10.7%, and the risk-free asset earns Rf= 4.5%. The CFO has studied similar projects of other companies and believes that the covariance between the returns of this project and the returns of the market is σP,M= 0.0063 (in decimal form).
1. What is the beta of the project? Enter your answer rounded to two decimal places.
2.According to the CAPM, what should be the required return of the project given its beta of 0.64? Enter your answer rounded to two decimal places.
3. Should the CFO accept the project? (Yes or No)
Step by step
Solved in 4 steps
