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?