ndicate whether the following statements are true or false. a. Investors prefer diversified companies because they are less risky. multiple choice 1 True False b. If stocks were perfectly positively correlated, diversification would not reduce risk. multiple choice 2 True False c. Diversification over a large number of assets completely eliminates risk. multiple choice 3 True False
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Indicate whether the following statements are true or false.
a. Investors prefer diversified companies because they are less risky.
multiple choice 1
-
True
-
False
b. If stocks were perfectly positively correlated, diversification would not reduce risk.
multiple choice 2
-
True
-
False
c. Diversification over a large number of assets completely eliminates risk.
multiple choice 3
-
True
-
False
d. Diversification works only when assets are uncorrelated.
multiple choice 4
-
True
-
False
e. Diversification reduces the portfolio beta.
multiple choice 5
-
True
-
False
f. A portfolio of stocks, each with a beta of 1.0, will have a beta of less than 1.0 unless the returns are perfectly correlated.
multiple choice 6
-
True
-
False
g. A stock with a low standard deviation always contributes less to portfolio risk than a stock with a higher standard deviation.
multiple choice 7
-
True
-
False
h. The contribution of a stock to the risk of a well-diversified portfolio depends on its market risk.
multiple choice 8
-
True
-
False
i. A well-diversified portfolio with a beta of 2.0 is twice as risky as the market portfolio.
multiple choice 9
-
True
-
False
j. An undiversified portfolio with a beta of 2.0 is less than twice as risky as the market portfolio.
multiple choice 10
-
True
-
False
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