To develop the new software, a company decides to invest in a research and development project. Assume that this cost X₀ of this project is deterministic but unknown to us. Once the software is developed (which will be at the end of 1 year), the company expects to sell its software for the price p with the expected value E(p) = $12,000 and the variance var(p) = 900, and the price p is correlated with the market return as

E((p - E(p))( r_M - E(r_M))) = 10,000 _M²

but the final amount received is given by

X₁ = p + ,

where is uncorrelated with both p and the market. Note that represents the randomness due to the possibility of a disaster at the company before the project is completed on one hand, and the possibility that during development, they discover some great new (and unrelated) technology, on the other hand.

Assume that E() = 0 and var() = 100. Assume that the risk-free rate is r_f = 5% and the expected return on the market is E(r_M) = 25%. (Assume efficient market.)

(Keep 4 decimal places to your answers.)

(Keep 4 decimal places to your answers.)

What is the standard deviation of the return of this project?

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What is the beta of this project?

_____________