You are going to add one of the three projects to your already well-diversified portfolio.
PROJECT 1
Standard
Probability Return Deviation
Beta
50% Chance 22% 12% 1.2
50% Chance -4%
PROJECT 2
Standard
Beta Probability Return Deviation
30% Chance 36% 12% 19.5 0.8
40% Chance 10.5%
30% Chance
PROJECT 3
Standard
Probability Return Deviation Beta
10% Chance 28% 12% 2
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 3 because the higher expected return on project 3 offsets its higher risk
b. project 2
c. project 1
d. project 3