Question: Assume that the Treasury bill rate is 7 percent and the expected return on the market

portfolio is 17 percent. Your firm is considering the following investment projects.

Project Beta Expected Return

In a top-level meeting of the firm's capital budgeting department, a financial analyst

named Rex Simpleton states that "the firm should undertake only those projects having

an expected return (i.e., predicted internal rate of return) that exceeds the market portfolio

rate of return of 17 percent. Therefore, the firm should accept projects C and D and reject

projects A and B.

The Chief Executive Officer then turns to you and asks whether you agree or disagree

with Rex. What is your response? Explain your reasoning. If you disagree, recommend a

better investment strategy and explain.