Which one of the following will decrease the risk of a portfolio that consists o

Question

Which one of the following will decrease the risk of a portfolio that consists of stocks, U.S. Treasury bills, and gold? Select one: a. Selling stocks and replacing them with U.S. Treasury bills b. Selling the gold and buying more diversified stocks c. Decreasing the number of securities in the portfolio d. Selling a .90 beta stock and buying a 1.1 beta stock e. Selling the large-company stocks and buying small-company stocks

If a firm recalculates its WACC based solely on lower growth expectations for the firm, the new WACC will be:

Select one:

a. Higher than the previous WACC because the cost of equity will increase.

b. The same as the previous WACC because growth expectations do not affect WACC.

c. Lower than the previous WACC because the cost of debt will decline.

d. Lower than the previous WACC because the cost of equity will decline.

e. Higher than the previous WACC because the cost of debt will increase.

An asset that has an expected rate of return above the security market line:

Select one:

a. Has a beta greater than 1.

b. Is underpriced.

c. Is less risky than the market.

d. Has a standard deviation equal to 0.

e. Is overpriced.

Explanation / Answer

SELLING STOCKS AND REPLACING THEM WITH U.S. TREASURY BILLS WILL DECEREASE THE RISK OF A PORTFOLIO.

BECAUSE US TREASURY BILL IS A RISK FREE STOCK, WHEN WE WILL REPLACE THE STOCK WITH US TREASURY BILL THE PORTFOLIO RISK WILL ULTIMATELY DECEREASED.

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THE NEW WACC WILL BE LOWER THAN THE PREVIOUS WACC BECAUSE THE COST OF EQUITY WILL DECLINE

BECAUSE IF THE GROWTH RATE DECLINES THE COST OF EQUITY WILL AUTOMATICALLY COMES DOWN WHICH WILL ULTIMATELY DECEREASE THE WACC.

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AN ASSET THAT HAS AN EXPECTED RATE OF RETURN ABOVE THE SECURITY MARKET LINE IS UNDERPRICED

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