The Saimoldstuff Restaurant chain is considering building a specialty restau- rant that will feature a new menu line designed for health-conscious diners. (The menu line will consist primarily of a choice of various vitamin and min- eral supplement tablets accompanied by either a carrot juice cocktail or Himalayan spring water.) The managers of Saimoldstuff have estimated the following probability distribution of returns for the new restaurant:

State of the Economy Probability Return Boom Re 30%

Moderate recovery 4 20%

Recession A —10%

The managers have also determined that the E(k,,) is 18% and Ryis 10%.

Required:
1. What is the expected return of the new restaurant?
2. In trying to evaluate the riskiness of the new restaurant, Saimoldstuff’s managers have found an existing restaurant with publicly traded shares that is an exact duplicate of the proposed restaurant. In evaluating the risk of this identical restaurant, the managers have determined that the restaurant’s return increases by 20% when the market portfolio’s return increases by 10%. Similarly, when the market return falls by 10%, the restaurant’s return falls by 20%. If this relationship holds for all return combinations, what is the beta of the existing restaurant?
3. Given your answer in question 2 above, and assuming the Saimoldstuff’s new restaurant will have the same level of non-diversifiable risk as the existing restaurant, what rate of return will Saimoldstuff’s owners require on the investment in the new restaurant?
4. Given your previous answers, should Saimoldstuff’s managers invest in the restaurant? Explain precisely why or why not.