(Solved)Consider an economy with three states which occur with


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Consider an economy with three states which occur with probability (0.2, 0.2, 0.6). Suppose a firm has a project which generates the state dependent cash flows (100, 240, 220) at t=1. Theinvestment costs are 140 at t=0. The firm owns this money. The market portfolio generates the payoff (200, 230, 260) and has an expected return of 10%. The risk free rate is 1%. Suppose the CAPM holds. (a) What is the beta of this project? (b) Explain whether the firm should conduct the project.

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