Question

Being Finance Manager of Salalah Textiles Industries, you need to invest an amount for OMR 50,000 in the investment market. Assume the market rate of return is 0.11, risk free rate of return is 2.75% and Beta is .73, then:
Required:
a) What should be required rate of return for your investment?


b) Keeping the answer of question # 2a in mind, if different investment options are available with different returns in the investment market, for example:

i. For investment in Project-A, 6.30% return is offered;
ii. For investment in Project-B, 10.95% return is offered, and
iii. For investment in Project-C, 5.65% return is offered.
In above scenario, explain whether any why these investment options are overvalued or undervalued?  










c) Keeping the answer of question # 2a and 2b, what will be your investment decision (justify your answer with reasons)

Answer 1

a As per Capital Assets pricing Model Required rate of Return (Re) = Rf+(Rm-Rf)*B Where Rf = Risk free rate Rm = Market rate of return B = Beta 2.75%+(11%-2.75%)*0.73 = 8.77% Required rate of Return (Re) = 8.77%