Financial Management
MBA 579 Homework Assignment 4-2
True/False
Indicate whether the statement is true or false.
____ 1. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
____ 2. The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.
____ 3. An individual stock's diversifiable risk, which is measured by the stock's beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
____ 4. A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.
____ 5. The slope of the SML is determined by the value of beta.
____ 6. The slope of the SML is determined by investors' aversion to risk. The greater the marginal investor's risk aversion, the steeper the SML.
____ 7. The exercise value is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.
____ 8. Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.
____ 9. If a project's NPV exceeds its IRR, then the project should be accepted.
____ 10. The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 11. Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% in Stock A and 50% in Stock
True/False
Indicate whether the statement is true or false.
____ 1. The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.
____ 2. The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.
____ 3. An individual stock's diversifiable risk, which is measured by the stock's beta, can be lowered by adding more stocks to the portfolio in which the stock is held.
____ 4. A firm can change its beta through managerial decisions, including capital budgeting and capital structure decisions.
____ 5. The slope of the SML is determined by the value of beta.
____ 6. The slope of the SML is determined by investors' aversion to risk. The greater the marginal investor's risk aversion, the steeper the SML.
____ 7. The exercise value is the positive difference between the current price of the stock and the strike price. The exercise value is zero if the stock's price is below the strike price.
____ 8. Because of the time value of money, the longer before an option expires, the less valuable the option will be, other things held constant.
____ 9. If a project's NPV exceeds its IRR, then the project should be accepted.
____ 10. The NPV method's assumption that cash inflows are reinvested at the cost of capital is more reasonable than the IRR's assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method.
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____ 11. Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% in Stock A and 50% in Stock