Dr. Dan is considering investment in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5 percent rate of return, risk-free rate is 5.5 percent,
and the rate of return on the market portfolio of assets is 8.5 percent?
r = RF + b(rm - RF)
= 0.055 + 1.75(0.085 - 0.055 ) = 0.108 = 10.75%
Dr. Dan should invest in the project because the project's actual rate of return (11.5 percent) is greater than the project's required rate of return (10.8 percent).
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