40. The value of a negative beta asset is ____ A) The higher expected return of

Question

40. The value of a negative beta asset is
____
A) The higher expected return of this asset
B) Non-existent because negative beta assets are theoretically impossible
C) The risk reducing property when added to a portfolio
D) That it is a necessary component to have a fully diversified portfolio
E) None of the above




41. As the number of securities in a portfolio increases, the amount of systematic risk
____
A) Remains constant
B) Decreases
C) Increases
D) Changes up and down


42. Utilizing the security market line (SML), an investor owning a stock with a beta of -2 would expect the stock

Explanation / Answer

40. The value of a negative beta asset is
____
A) The higher expected return of this asset
B) Non-existent because negative beta assets are theoretically impossible
C) The risk reducing property when added to a portfolio
D) That it is a necessary component to have a fully diversified portfolio
E) None of the above




41. As the number of securities in a portfolio increases, the amount of systematic risk
____
A) Remains constant
B) Decreases
C) Increases
D) Changes up and down


42. Utilizing the security market line (SML), an investor owning a stock with a beta of -2 would expect the stock’s return to ____ in a market that was expected to decline 15%.
____
A) Rise or fall an indeterminate amount
B) Fall by 3%
C) Fall by 30%
D) Rise by 13%
E) Rise by 30%


43. An increase in the risk-adjusted discount rate (RADR) for a risky project will result in
____
A) No change to the NPV
B) An increase in the IRR
C) An increase in the NPV
D) A decrease in the NPV
unsure......

44. XYZ Inc. has an overall (composite) WACC of 10%, which reflects the cost of capital for its average asset. Its assets vary widely in risk. XYZ evaluates low-risk projects with a WACC of 8%, average projects at 10%, and high-risk projects at 12%. The company is considering the following projects:
Project Risk Expected Return
A High 15%
B Average 12%
C High 11%
D Low 9%
E Low 6%
Which set of projects would maximize shareholder wealth?
____
A) A, B, and C
B) A, B, and D
C) A, B, C, and D
D) A, B, C, D, and E

45. A firm is considering a new project whose risk is greater than the risk of the firm’s average project, based on all methods for assessing risk. In evaluating this project, it would be reasonable for management to do which of the following?
____
A) Increase the estimated IRR of the project to reflect its greater risk
B) Reject the project, since its acceptance would increase the firm’s risk
C) Ignore the risk differential if the project would amount to only a small fraction of the firm’s total assets
D) Increase the cost of capital used to evaluate the project to reflect the project’s higher-than-average risk

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