Risk,return,and Capital Budgeting

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Question 1

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The capital asset pricing model (CAPM)assumes that the stock market is dominated by well-diversified investors who are concerned only with market risk.

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Question 2

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The CAPM states that the expected risk premium on any security equals its beta times the market risk premium.

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Question 3

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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.

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Question 4

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The required risk premium for any given investment is defined by the security market line.

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Question 5

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There is little doubt that the CAPM captures everything that is going on in the market.

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Question 6

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Beta measures the total risk of an individual security.

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Question 7

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The security market line provides a standard that can be used to make project acceptance/rejection decisions.

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Question 8

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If a low-risk company invests in a high-risk project,those cash flows should be discounted at a high cost of capital.

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Question 9

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The project cost of capital depends on the risk of the company undertaking the project.

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Question 10

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Beta measures a stock's sensitivity to market risks.

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Question 11

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The project cost of capital depends on how the capital is used.

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Question 12

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Investors expect aggressive stocks to outperform the market in periods of strong economic activity.

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Question 13

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Defensive stocks typically provide better returns during periods of economic downturn since they are not very sensitive to market fluctuations.

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Question 14

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Diversification decreases the variability of both specific and market risk.

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Question 15

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Market risk premium is defined as the difference between the market rate of return and the risk-free interest rate.

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Question 16

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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.

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Question 17

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The stocks of gold-mining companies commonly have above-average volatility but relatively low betas.

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Question 18

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According to the capital asset pricing model,the expected rates of return for all projects lie on the security market line.

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Question 19

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As a project's beta increases,the project's opportunity cost of capital increases.

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Question 20

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A project should be accepted if its return plots below the security market line.

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