The CFO of MediSearch plc believes that investing into a project which will develop a new drug
Question:
The CFO of MediSearch plc believes that investing into a project which will develop a new drug for fighting the flu virus, promises a long-term annual return of 13%. The expected return of the market index is RM = 10.2%, the volatility of the market index is σM = 12%, and the risk-free asset earns Rf = 5.1%. The CFO has studied similar projects of other companies and believes that the covariance between the returns of this project and the returns of the market is σ P,M = 0.0074
(The answer should be .51, but I don't know the formula on how to get it.)
b) According to the CAPM, what should be the required return of the project given its beta of 0.51? Enter your answer rounded to two decimal places.
c) Should the CFO accept the project?
Cost Management Accounting and Control
ISBN: 978-0324559675
6th Edition
Authors: Don R. Hansen, Maryanne M. Mowen, Liming Guan