1A) You are going to add one of the following three projects to your already well diversified portfolio. PROJECT 1 PROJECT 2 Standard Standard Probability Return Deviation Beta Probability Return Deviation Beta 50% Chance 22% 12% 1.2 30% Chance 36% 19.5% 0.8 50% Chance -4% 40% Chance 10.5% 30% Chance -20% PROJECT 3 Standard Probability Return Deviation Beta 10% Chance 28% 12% 2.0 70% Chance 18% 20% Chance -8% Assume the risk-free rate of return is 2% and the market risk premium is 8%. If you are a risk averse investor, which project should you choose? a. Either Project 2 or Project 3 because the higher expected return on project 3 offsets its higher risk. b. Project 2 c. Project 1 d. Project 3 1B The beta of ABC Co. stock is the slope of: a. The arbitrage pricing line. b. The security market line. c. The characteristic line for a plot of returns on the S&P 500 versus returns on short-term Treasury bills. d. The characteristic line for a plot of ABC Co. returns against the returns of the market portfolio for the same period.