Which of the following is NOTa potential problem when estimating and using betas, i.e., which statement is FALSE? a. The fact that a security or project may not have a past history that can be used as the basis for calculating beta. b. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. c. The beta of an "average stock," or "the market," can change over time, sometimes drastically. d. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. e. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. This calculated historical beta may differ from the beta that exists in the future. Explain the choice

Which of the following is NOTa potential problem when estimating and using betas, i.e., which statement is FALSE? a. The fact that a security or project may not have a past history that can be used as the basis for calculating beta. b. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. c. The beta of an "average stock," or "the market," can change over time, sometimes drastically. d. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. e. The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. This calculated historical beta may differ from the beta that exists in the future. Explain the choice

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section11.8: Project Risk Conclusions

Problem 2ST

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Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE? a. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. b. The beta of an "average stock," or "the market," can change over time, sometimes drastically. c. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. d. All of the statements above are true. e. The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
What does a low standard error mean relative to beta?A. Beta is a reliable measurement of risk B. Beta has very little meaning C. There is tremendous benefit to be gained from diversification D. Nothing related
Which of the following statements is CORRECT? a. The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers. b. Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well-diversified investor, assuming investors expect the observed relationship to continue on into the future. c. If investors become less risk averse, the slope of the Security Market Line will increase. d. If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock. e. The slope of the SML is determined by the value of beta.
Beta calculations are subject to which of the following limitations? a. The market's rate of return varies from year to year. b. Beta is known to be erratic and unpredictable. c. Collecting rate of return data on individual assets is difficult. d. Beta is determined from historical data, and the stock's characteristics might have changed since hte measurement was performed.
Which of the following is FALSE regarding advantages and disadvantages of the SML or CAPM? ) The model does NOT consider systematic risk. ) The model relies on the past to predict the future, which is not always reliable. The model is applicable to all companies, as long as beta is available. () The user must estimate the expected market risk premium, which varies over time. A company's beta can vary over time. Next Page Page 30 of 30 Previous Page Submit Quiz O of 30 questions saved
The WACC is an estimate. Explain what the risk is of estimating the WACC lower than a company’s actual WACC and the risk of estimating the WACC higher than the actual WACC.
In an efficient market when asset expected returns are plotted against asset betas, then all assets would be on the security market line A. Because all assets have the same beta B. Because no assets have the same risk premium C. Because all assets have the same reward to risk ratio D. Because all assets have the same systematic risk E. Because all assets have the same average amount of systematic risk
"If a security plots below the security market line, it is: ignoring all of the security's specific risk. "underpriced, a situation that should be temporary." offering too little return to justify its risk. "a defensive security, which expects to offer lower returns. " %3D
Applying the capital asset pricing model requires that one find appropriate inputs for the risk-free rate, the market rate of return (and market risk premium), and beta. Why is beta, in particular, difficult to pin down? a. People don't have ready access to financial data and won't have any source for this information in the near future. b. The major internet sources of financial data are notoriously unreliable. c. Hackers have been known to manipulate financial data for their own purposes. d. People must rely on historical performance information, and they have to assume that historical relationships continue into the future.
If the security market is efficient in the strong form, then _____. Group of answer choices a. it is impossible to consistently outperform the market by using technical analysis, which tries to find security mispricing by analyzing historical security price data b. it is impossible to consistently outperform the market by using fundamental analysis, which tries to find security mispricing by analyzing non-price public information c. it is impossible to consistently outperform the market by using inside information d. it is impossible to consistently outperform the market by using technical analysis, fundamental analysis or inside information
List which of the following statement(s) concerning risk are correct? 1. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.
What should a company do when the cost of eliminating the conditions that create an IT risk exceeds the potential losses that may occur? a. Accept the risk b. Reduce the risk c. Avoid risk d. Transfer the risk

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	a.	The fact that a security or project may not have a past history that can be used as the basis for calculating beta.
	b.	Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta.
	c.	The beta of an "average stock," or "the market," can change over time, sometimes drastically.
	d.	Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed.
	e.	The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. This calculated historical beta may differ from the beta that exists in the future.