Based on CAPM, which of the following is a true statement The stock\'s total ris

Question

Based on CAPM, which of the following is a true statement The stock's total risk is measured by its Beta. The firm specific risk of a stock can be reduced by diversification Expected return of a company's stock should be determined by its Standard deviation measures stock's systematic risk. Out of the following methods of evaluating projects, which one of t consideration the time value of money? Payback period Internal rate of return Profitability index Net present value The internal rate of return is the: rate of return needed for a project to payback within the rate computed by discounting the cash inflows and dividing b; rate of return that equals to firm's weighted average cost of ca discount rate that causes the net present value of a project to e As the CFO of General Motor, you know your company has an over Which one of the following projects would you accept if you make internal rate of return and profitability index (PI) information as Project A with PI 98% Project B with IRR 10% Project C with IRR 9% Project D with PI 10% Which one of the following methods of raising capital is associated burden) to the firm? Issuing new common stocks Issuing new preferred stocks Issuing new corporate bonds Keeping more retained earnings in the firm Part II: Problem Solving. Write down formula and steps for partial credit An analyst estimates that the Bank of America (BOA) stock will have depending on the state of the economy. What is the expected return

Explanation / Answer

1. The right answer is B.

Reason: Risk can be of two types: Systematic risk and unsystematic risk. Unsystematic risk is a type of risk which can be eliminated through diversification. This risk is also called as firm specific risk. Example: If there is employee strike in the company you have invested, it is related to that specific company and will not impact others. Hence, it can be avoided using diversification strategy.

The other type of risk is systematic risk. This cannot be eliminated through diversification. In the CAPM model, systematic risk is measured using Beta.

2. The payback period method of capital bugeting does not consider time value of money, where as the profitability index method, the internal rate of return method and the net present value method considers the time value of money while evaluating the projects.

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