Penney Fashions is adding a new line of shoes to the company portfolio

Penney Fashions is adding a new line of shoes to the company portfolio and has the following information: the expected market return is 13%, the risk-free rate is 3%, and the expected return on the new project is 11%.

What is the beta of the project?
A) 0.60
B) 0.70
C) 0.80
D) 0.90

ANSWER

Answer: C
Explanation: C) This problem requires the student to rearrange the SML equation; it is not specifically covered in the text.
Re = rf + [E(rm) – rf] β, and therefore, β = = = 0.80.