Redesign Corp is considering a new strategy that would increase its expected return from 12% to 13.9%, but
would also increase its beta from 1.2 to 1.8.
If the risk-free rate is 5% and the return on the market is expected to
be 10%, should Redesign change its strategy?
No. Currently the company's required return is 11% and the company is earning 12%. After the changes, the
company's required return would increase to 14%, but its expected return would increase to only 13.9%. Thus, the
increased return is not sufficient to justify the increased risk.
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