Hrm/531 Week 3 Quiz
QUESTION FIVE (6 marks)
Please answer each of the following questions. Each solution should be accompanied by a brief explanation of no more than two (2) typed lines in length.
A) Cynthia is the Chief Financial Officer of Big Corporation (BC). Cynthia’s current objective is to evaluate five new projects with a total capital requirement of $6 million. All of the projects have a positive NPV. The overall capital available for new projects for the next year is $5 million. Which of the following statements about the capital budgeting process that Cynthia should employ is true?
1) Cynthia should rank the projects in increasing order of NPV and choose the highest ranked projects in order until the capital available is exhausted.
2) Cynthia …show more content…
Explanation: Calculating combinations of different projects will give Cynthia a better idea in which projects to invest in. NPV also provides proper rule for choosing mutually exclusive projects
B) Which of the following statements about diversification is false?
1) Diversification can be accomplished by adding a stock that is perfectly positively correlated with the investor’s existing stock portfolio.
2) As the number of stocks in the portfolio increases, the diversifiable risk of the portfolio reduces.
3) When stock returns do not move perfectly with each other, the variations in the returns on one stock may be countered by variations in other stocks’ returns.
4) A perfectly diversified portfolio will still have risk equal to systematic risk
Explanation: Diversification works best when returns are negatively correlated. If one investment does bad the second investment will make up for the loss and it works because stocks do not move exactly together.
C) Which of the following statements about systematic risk is …show more content…
Even if the stocks are negatively correlated some risk still exists.
D) Which of the following statements correctly describes the investment decisions of risk averse investors?
1) Investors choose stock portfolios that have zero systematic risk.
2) Investors choose stock portfolios that have zero unsystematic risk.
3) Investors choose stock portfolios with the greatest expected return.
4) Investors choose stock portfolios with the lowest expected return.
Explanation: A risk averse investor will always choose to invest their money in a guaranteed return investment but low rate investment such as T-bills or bonds. E) Which of the following is true about the NPV and IRR techniques?
1) The NPV and IRR techniques always provide the same ranking of different investment projects.
2) The NPV and IRR techniques explicitly consider the cost of capital and the time value of money.
3) All projects can have only one value for NPV and one value for IRR.
4) The NPV technique cannot provide information on how acquiring the project will contribute to shareholders’
Please answer each of the following questions. Each solution should be accompanied by a brief explanation of no more than two (2) typed lines in length.
A) Cynthia is the Chief Financial Officer of Big Corporation (BC). Cynthia’s current objective is to evaluate five new projects with a total capital requirement of $6 million. All of the projects have a positive NPV. The overall capital available for new projects for the next year is $5 million. Which of the following statements about the capital budgeting process that Cynthia should employ is true?
1) Cynthia should rank the projects in increasing order of NPV and choose the highest ranked projects in order until the capital available is exhausted.
2) Cynthia …show more content…
Explanation: Calculating combinations of different projects will give Cynthia a better idea in which projects to invest in. NPV also provides proper rule for choosing mutually exclusive projects
B) Which of the following statements about diversification is false?
1) Diversification can be accomplished by adding a stock that is perfectly positively correlated with the investor’s existing stock portfolio.
2) As the number of stocks in the portfolio increases, the diversifiable risk of the portfolio reduces.
3) When stock returns do not move perfectly with each other, the variations in the returns on one stock may be countered by variations in other stocks’ returns.
4) A perfectly diversified portfolio will still have risk equal to systematic risk
Explanation: Diversification works best when returns are negatively correlated. If one investment does bad the second investment will make up for the loss and it works because stocks do not move exactly together.
C) Which of the following statements about systematic risk is …show more content…
Even if the stocks are negatively correlated some risk still exists.
D) Which of the following statements correctly describes the investment decisions of risk averse investors?
1) Investors choose stock portfolios that have zero systematic risk.
2) Investors choose stock portfolios that have zero unsystematic risk.
3) Investors choose stock portfolios with the greatest expected return.
4) Investors choose stock portfolios with the lowest expected return.
Explanation: A risk averse investor will always choose to invest their money in a guaranteed return investment but low rate investment such as T-bills or bonds. E) Which of the following is true about the NPV and IRR techniques?
1) The NPV and IRR techniques always provide the same ranking of different investment projects.
2) The NPV and IRR techniques explicitly consider the cost of capital and the time value of money.
3) All projects can have only one value for NPV and one value for IRR.
4) The NPV technique cannot provide information on how acquiring the project will contribute to shareholders’