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52) You are going to add one of the following three projects to your already welldiversifi ed portfolio. 14 Final Examination Introduction to Financial Management
52) You are going to add one of the following three projects to your already welldiversifi ed portfolio. 14 Final Examination Introduction to Financial Management 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
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