1. True --False Assume a risk averse investor and two
investments. If project A has an expected return of 10% and project C has an
expected return of 12%, the risk averse investor would be indifferent between
the two projects.
2. True --False Portfolios that offer the lowest expected
return for a given variance or standard deviation are known as efficient
3. True --False Investors are mainly concerned with those
risks that cannot be eliminated through diversification.
4. True --False Beta measures the marginal contribution
of a stock to the risk of an undiversified portfolio.
5. True --False According to CAPM, all investments should
plot along the security market line and the vertical distance of actual return from
the line is known as gamma.
6. True --False The company cost of capital is the
correct discount rate for any project undertaken by the company.
7. True --False Each project should be evaluated at its
own opportunity cost of capital. The true cost of capital depends on the use to
which the capital is put.
8. True --False The company cost of capital is the cost
of debt of the firm.
9. True --False The company cost of capital could be the
cost of equity in an all equity financed firm.
10. True --False It is generally more accurate to use an
"industry beta" for a portfolio of companies in the same industry
than to use the beta for a single company in estimating the cost of equity
11. True --False Generally for long term project
evaluation, the value to use for the risk-free rate is the short-term Treasury
12. True --False Most of the beta is in the industry, and
firms with high operating leverage tend to have higher asset betas.