11.1. A project has an expected cash flow of $1 million one year from now. The standard deviation of this cash flow is $250,000. If the expected return of the market portfolio is 10 percent, the risk-free rate is 5 percent, the standard deviation of the market return is 5 percent, and the correlation between this future cash flow and the return on the market is .5, what is the present value of the cash flow?

Assume the CAPM holds. Hint: Use the certainty equivalent method.

Year 1 Restaurant Market Market Cash Flow Scenario Probability Return (%) Forecast Bad .25
15 $40 million Good .50 5 $50 million Great .25 25 $60 million Assume also that the CAPM holds.