Beta and Standard Deviation for Business Decision Making
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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?
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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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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 ...
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