YOUR FIRM INVEST IN A SET OF RISKY PROJECTS THAT INCREASE THE DIVERSIFIABLE RISK

Question

YOUR FIRM INVEST IN A SET OF RISKY PROJECTS THAT INCREASE THE DIVERSIFIABLE RISK OF THE FIRM WITHOUT CHANGING ITS SYSTEMATIC RISK. ALL ELSE THE SAME, THE EXPECTED RISK PREMIUM ON THE STOCK IS MOST LIKELY TO: SELECT ONE: A. INCREASE OR DECREASE, MORE INFORMATION IS NEEDED. B. REMAIN UNCHANGED, BECAUSE THE LEVEL OF SYSTEMATIC RISK IS UNCHANGED. C. INCREASE OR DECREASE, DEPENDING ON THE INTERNAL RATE OF RETURN OF THE NEW PROJECTS. D. DECREASE, BECAUSE THE DIFFERENCE BETWEEN THE EXPECTED RETURN ON THE FIRM'S STOCK AND THE RISK-FREE RATE WILL NARROW. E. INCREASE, BECAUSE THE DIFFERENCE BETWEEN THE EXPECTED RETURN ON THE FIRM'S STOCK AND THE RISK-FREE RATE WILL WIDEN.

Explanation / Answer

Answer: B. REMAIN UNCHANGED, BECAUSE THE LEVEL OF SYSTEMATIC RISK IS UNCHANGED.

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