Chapter 12 - Test Bank - Chapter 12 Risk Return and Capital...

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Chapter 12 - Risk, Return, and Capital Budgeting Chapter 12 Risk, Return, and Capital Budgeting True / False Questions 1. Since 1926 the average annual difference between the returns on value and growth stocks has been 3.8%. True False 2. The capital asset pricing model (CAPM) assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk. True False 3. The CAPM states that the expected risk premium on any security equals its beta times the market risk premium. True False 4. There is little doubt that the CAPM captures everything that is going on in the market. True False 5. The security market line displays the relationship between expected return and beta. True False 6. The security market line sets a standard for other investments—investors will be willing to hold other investments only if they offer equally good prospects as shown by the points on the line. True False 12-1
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Chapter 12 - Risk, Return, and Capital Budgeting 7. The required risk premium for any investment is given by the security market line: Risk premium on investment = beta expected market risk premium. True False 8. Empirical evidence suggested that over a long period of time returns did indeed increase with beta. True False 9. The security market line provides a standard for project rejection. True False 10. If a low-risk company invests in a high-risk project, those cash flows should be discounted at a high cost of capital. True False 11. The project cost of capital depends on the project and hence also on the risk of the company. True False 12. Beta measures a stock's sensitivity to market risks. True False 13. The project cost of capital depends on how the capital is used. True False 12-2
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Chapter 12 - Risk, Return, and Capital Budgeting 14. Investors expect aggressive stocks to outperform the market in periods of strong economic activity. True False 15. Defensive stocks typically provide better returns during periods of economic downturn since they are not very sensitive to market fluctuations. True False 16. Diversification decreases the variability of both unique and market risk. True False 17. Market risk premium, also known as the risk premium of market portfolio, is defined as the difference between market return and return on risk-free Treasury bills. True False 18. The cost of capital for a project depends on the risk of the company. True False 19. According to the CAPM, a stock's expected return is positively related to its beta. True False 20. The CAPM is a theory of the relationship between risk and return that states that the expected risk premium on any security equals its beta times the market return. True False 12-3
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Chapter 12 - Risk, Return, and Capital Budgeting 21. The stock of Newmont Mining, the world's largest gold producer, has above-average volatility but relatively low beta.
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