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Beta and Standard Deviation for Business Decision Making

ABC Company are now considering the following new projects and to introduce the most attractive project to the shareholders of ABC Company.

Project A
Expected return / Beta coefficient / Standard deviation of returns are 18% / 1.3 / 44%
Project B
Expected return / Beta coefficient / Standard deviation of returns are 16% / 1.17 / 67%
Project C
Expected return / Beta coefficient / Standard deviation of returns are 26% / 1.72 / 60%

The risk-free-rate and expected market return are 5% and 15%.

Kindly help me to explain whether ABC should be focused on the new projects's beta or the standard deviation for making a decision. And which is the best? Why?

Solution Preview

ABC should focus on the new project's beta.

A very risky project will have a high beta coefficient, whereas low risk projects will have a lower beta.

Knowing a project's beta (and thus its minimum required return) is important, because it indicates whether or not the expected rate of return is above, equal to, or below the ...

Solution Summary

This solution provides step-by-step calculations and explanations for whether a company should be focused on a new project's beta or standard deviation for making a decision.

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