Currently, Zapata Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT? O a. The proposed new project would have more stand-alone risk than the firm's typical project. O b. The proposed new project would increase the firm's corporate risk. O c. The proposed new project would increase the firm's market risk. O d. The proposed new project would not affect the firm's risk at all. O e. The proposed new project would have less stand-alone risk than the firm's typical project.

Currently, Zapata Products has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that a proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project's sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT? O a. The proposed new project would have more stand-alone risk than the firm's typical project. O b. The proposed new project would increase the firm's corporate risk. O c. The proposed new project would increase the firm's market risk. O d. The proposed new project would not affect the firm's risk at all. O e. The proposed new project would have less stand-alone risk than the firm's typical project.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Q16 A manager believes his firm will earn a 14 percent return next year. His firm has a beta of 1.5, the expected return on the market is 12 percent, and the risk-free rate is 4 percent.Compute the return the firm should earn given its level of risk. REQUIRED RETURN. % Determine whether the manager is saying the firm is undervalued or overvalued.multiple choice undervalued overvalued
11. A company has a possible project and has identified the two major areas of risk as being the inflation and the movement in world oil prices. It has calculated various possible NPVs as follows: Oil price change Decrease Unchanged Increase Demand Probability 0.1 0.3 0.6 Low 0.2 £2m £1m -£4m Medium 0.3 £3m £2m -£1m High 0.5 £6m £5m £2m What is the probability that the project will have a negative NPV? A) 0.12 B) 0.30 C) 0.36 D) 0.70
A4) Finance which of the following statements on consumption-based asset pricing are correct? 1. The power utility model predicts that the variance of consumption growth is positively related to the risk-free rate. 2. Assets that perform well when marginal utility is high should earn lower expected returns. 3. In the data, consumption growth is smooth with low standard deviation relative to stock returns. 4. In the data, the sharpe ratio of the market portfolio is about 50% per year. This implies the standard deviation of any valid stochastic discount factor that can explain the equity risk premium puzzle must be less than 50%
State of the Economy Probability Market Return Investment ReturnExpansion 0.30 40% 60%Normal 0.50 10% 25%Recession 0.20 -15% -40% Compute the beta of the investment
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