Please answer the question on attached file An increase in the market risk premium will generallymake the security market line steeperreduce the cost of equityO induce the firm to select riskier projectsO induce the firm to select projects with higher betas

Instead of holding the risk-free assets, the additional return which the investors receive for…

An increase in the market risk premium will generally make the security market line steeper O reduce the cost of equity O induce the firm to select riskier projects O induce the firm to select projects with higher betas

An increase in the market risk premium will generally make the security market line steeper O reduce the cost of equity O induce the firm to select riskier projects O induce the firm to select projects with higher betas

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter6: Risk And Return

Section: Chapter Questions

Problem 12MC: Calculate the correlation coefficient between Blandy and the market. Use this and the previously...

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You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the value of diversification or why stocks with the biggest standard deviations dont always have the highest expected returns. Your assignment is to address the clients concerns by showing the client how to answer the following questions: d. Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a particular portfolio efficient? Dont worry about specific values when constructing the graphmerely illustrate how things look with reasonable data.
Determine whether each of the statements (a)–(c) is True or False. A) Underestimation of the market risk premium results in the underestimation of the cost of capital for a project and in turn increases the likelihood that a negative NPV project is falsely accepted. B) The CAPM beta of a security measures the variability of the return of the security in isolation. C) If an investor holds a well-diversified portfolio, the type of risk left in such a portfolio is primarily the idiosyncratic risk. Answer: a) b) c)
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Wolseley manufacturing Co. invests in a group of risky projects, which increases the unsystematic risk of the firm, but does not change the systematic risk of the firm. All else the same, the expected risk premium on its common stock is most likely to: Select one: a. Increase, because the difference between the expected return on the firm's stock and the risk-free rate will widen. b. Increase or decrease, depending on the internal rate of return of the new projects. c. Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will widen. d. Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will narrow. e. Remain unchanged, because the level of systematic risk is unchanged.
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In the equation for expected return from the CAPM, the only input specific to the firm in question is...O. the risk-free rate.O. the market risk premium.O. beta.O. all of the above.
Which of the following investment strategies involves generating a higher expected rate of return through increasing risk? a. Leverage b. Value at risk c. Diversifying d. Hedging risk
Exploring Finance: Security Market Line. Security Market Line Conceptual Overview: Explore the determinants of the security market line. The Security Market Line defines the required rate of return for a security to be worth buying or holding. The line, depicted in blue in the graph, is the sum of the risk-free return (rf in the slider) and a risk premium determined by the market-risk premium (RPM) multiplied by the security's beta coefficient for risk. Drag the rf slider below the graph to change the amount of the risk-free return. These changes reflect changes in inflation. Drag the RPM slider below the graph to change the relationship between a security's beta coefficient and the amount of the market risk premium. Drag left or right on the graph to move the cursor line to evaluate securities with different beta coefficients. r = r_{RF} + RP_M * beta = 6\% + 5\% * 1 = 6\% + 5.00\% = 11.00\%r=rRF+RPM∗beta=6%+5%∗1=6%+5.00%=11.00% 1. For a risk-free return rate of 5%, a…
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