Dr. Dan is considering investing in a project. The project has a beta of 1.75 and an expected rate of return of 11.5%. The risk-free rate is 5.5% and the market rate of return is 8.5%. Should Dr. Dan invest in this project?

1. Problem Description

Dr. Dan is considering investing in a project. The project has a beta of 1.75 and an expected rate of return of 11.5%. The risk-free rate is 5.5% and the market rate of return is 8.5%. Should Dr. Dan invest in this project?

2. Solution Steps

We can use the Capital Asset Pricing Model (CAPM) to determine the required rate of return for this investment, given its beta, the risk-free rate, and the market rate of return.

The CAPM formula is:

$Required\ Return = Risk\ Free\ Rate + Beta * (Market\ Return - Risk\ Free\ Rate)$

Plugging in the given values:

$Required\ Return = 5.5\% + 1.75 * (8.5\% - 5.5\%)$

$Required\ Return = 5.5\% + 1.75 * (3\%)$

$Required\ Return = 5.5\% + 5.25\%$

$Required\ Return = 10.75\%$

The required rate of return for this investment, according to CAPM, is 10.75%. The investment offers an expected return of 11.5%. Since the expected return (11.5%) is greater than the required return (10.75%), the investment is attractive.

3. Final Answer

Yes, Dr. Dan should invest in this project because the expected return of 11.5% is greater than the required return of 10.75% calculated using the CAPM.