Which of the following describes a project being considered by a firm that plots
ID: 2802738 • Letter: W
Question
Which of the following describes a project being considered by a firm that plots above the security market line.
.
The project has a positive net present value.
The project's beta is too high.
The project has high project risk.
The project has a negative net present value.
Both C and D
Which of the following describes a project being considered by a firm that plots above the security market line.
.
A.The project has a positive net present value.
B.The project's beta is too high.
C.The project has high project risk.
D.The project has a negative net present value.
E.Both C and D
Explanation / Answer
A is correct.
Security Market Line (SML) is a plot of expected returns and beta (risk) of an investment. The plots below the SML are investment that offer lower returns relative to the underlying risk and hence, they are overvalued stocks or negative NPV projects. The plots above the SML are investments that offer higher returns relative to the risk and hence are undervalued stocks and have positive NPV.
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