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Unformatted text preview: the Cost of Capital 19) Which of the following statements is false? A) The Sharpe ratio if the portfolio tells us how much our expected return will increase for a given increase in volatility. B) We should continue to trade securities until the expected return of each security equals its required return. C) The required return is the expected return that is necessary to compensate for the risk that an investment will contribute to the portfolio. D) If security i’s required return exceeds its expected return, then adding more of it will improve the performance of the portfolio. Answer: D
Explanation: A) B) C) D) 20) Which of the following statements is false? A) Because all other risk is diversifiable, it is an investment’s beta with respect to the efficient portfolio that measures its sensitivity to systematic risk, and therefore determines its cost of capital. B) If a securityʹs expected return exceeds its required return given our current portfolio, then we can improve the performance of our portfolio by adding more of the security. C) The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. D) As we buy shares of a security i, its correlation with our portfolio P will increase, ultimately raising its required return until E[Ri] = Rp. Answer: D
Explanation: A) B) C) D) Corporate Finance: The Core (Berk/DeMarzo) Chapter 12 - The Capital Asset Pricing Model 21) Which of the following is not an assumption used in deriving the Capital Asset Pricing Model (CAPM)? A) Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. B) Investors have homogeneous risk adverse preferences toward taking on risk. C) Investors hold only efficient portfolios of traded securities, that is portfolios that yield the maximum expected return for the given level of volatility. D) Investors can buy and sell all securities at competitive market prices without incurring taxes or transac...
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This document was uploaded on 02/02/2014.
- Fall '14