CAPM and Capital Budgeting Decision. The Taylor Corporation is evaluating some new capital budgeting projects. Their evaluation method involves comparing each project’s risk-adjusted return obtained...

CAPM and Capital Budgeting Decision. The Taylor Corporation is evaluating some new capital budgeting projects. Their evaluation method involves comparing each project’s risk-adjusted return obtained from the capital asset pricing model (CAPM) with the project’s average rate of return. The following data are provided:

Projects               Beta

A                             -0.5

B                             0.8

C                             1.2

D                             2.0

Possible rates of return and associated probabilities are:

Rates of Return (%)

(0.4)       (0.5)      (0.1)

A             4              2              5

B             2              6             12

C             10           15           20

D             -8           25           50

Assume that the risk-free rate of return is 6 percent and the market rate of return is 12 percent. Which projects should be selected?