A firm’s existing assets have an expected return of 16% and an associated standard deviation of 20%. A proposed project has an expected return of 26% and an associated standard deviation of 30%. The covariance between the existing firm and the project is estimated to be 0.35%. The market value of the firm’s existing assets is $8,000,000. The project costs $2,000,000. Assume risk free rate is 6%.
(A) Calculate the reward to risk ratio for the firm.
(B) Calculate the reward to risk ratio for the project.
(C) Calculate the reward to risk ratio for the combination of the firm and the project.