23.3

3. What do we use b for in capital budgeting and why? (4 pts)

We use b for the systematic risk of the project. We need a measure of systematic risk because our shareholders are only concerned about systematic risk. Since they can diversify away unsystematic risk, they are not rewarded for bearing it. They are rewarded for systematic risk, however. Thus, if we take on a project with high systematic risk, it must also offer high return.

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