When using CAPM to determine a benchmark return against which to compare a proje
ID: 2658325 • Letter: W
Question
When using CAPM to determine a benchmark return against which to compare a project?s IRR, you should
A) use the yield on a one-year Treasury security as your risk-free rate.
B) use the yield on a ten-year Treasury security as your risk-free rate.
C) use the yield on a Treasury security that most closely matches the duration of your
project as your risk-free rate.
D) use the yield on a three-month Treasury security as your risk-free rate.
A) use the yield on a one-year Treasury security as your risk-free rate.
B) use the yield on a ten-year Treasury security as your risk-free rate.
C) use the yield on a Treasury security that most closely matches the duration of your
project as your risk-free rate.
D) use the yield on a three-month Treasury security as your risk-free rate.
Explanation / Answer
Answer: Option "C" is correct that says, "Use the yield on a Treasury security that most closely matches the duration of your project as your risk-free rate"
If you use the yield on a treasury bill that is most close to the duration of your project, it will be more accurate and will give the best comparison.