PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 22, Problem 3PS
Real options True or false?
- a. Real-options analysis sometimes tells firms to make negative-
NPV investments to secure future growth opportunities. - b. Using the Black–Scholes formula to value options to invest is dangerous when the underlying investment project would generate significant immediate cash flows.
- c. Binomial trees can be used to evaluate options to acquire or abandon an asset. It’s OK to use risk-neutral probabilities in the trees even when the asset beta is 1.0 or higher.
- d. It’s OK to use the Black–Scholes formula or binomial trees to value real options, even though the options are not traded.
- e. A real-options valuation will sometimes reveal that it’s better to invest in a series of smaller plants rather than a single large plant.
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Arbitrage is the idea that one can (select the best answer):
Group of answer choices
Buy and Sell different assets or packages of assets at different prices such you can earn a riskless profit without investing any capital.
Earn rates of return greater than the average for the market by successfully “picking” stocks.
Earn abnormal returns above what CAPM would predict for a particular security.
True or False. and briefly explain.
a. Under the Capital Asset Pricing Model (CAPM), if a stock has a zero beta, then it must be identical to the riskfree asset.
b. For Value at Risk (VaR) to be useful, the returns have to be normally distributed.
c.If the borrowing rate is higher than the lending rate, a particular risk-averse investor can achieve a maximized utility score of UC* by choosing optimally. Now if the borrowing rate is equal to the lending rate, this investor must be able to achieve a utility score higher than UC*
Which of the following statements is correct concerning a mean-variance efficient portfolio of risky assets in a world where there is also a
risk-free asset?
OA. It will be impossible to form a different portfolio yielding a lower level of risk unless the portfolio also earns a lower return,
O B. Risk averse investors will only choose to invest in the market portfolio (M) regardless of the risk-free rate.
OC. The portfolio will always achieve the maximum possible returns.
O D. The portfolio will always be inside the feasible set.
Chapter 22 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 22 - Real options Respond to the following comments. a....Ch. 22 - Prob. 2PSCh. 22 - Real options True or false? a. Real-options...Ch. 22 - Prob. 4PSCh. 22 - Real options Describe each of the following...Ch. 22 - Expansion options Look again at the valuation in...Ch. 22 - Expansion options Look again at Table 22.2. How...Ch. 22 - Prob. 8PSCh. 22 - Timing options Look back at the Malted Herring...Ch. 22 - Prob. 10PS
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- 3. The beta for the risk-free investment is closest to: A) 1. B) 0. C) Unable to answer this question without knowing the risk-free rate. D) Unable to answer this question without knowing the market's volatility.arrow_forwardAnswer whether each of the following statements is correct and explain your argument. \ (a) According to CAPM, the expected return of a risky asset is larger than the risk free rate. (b) According to CAPM, the expected return of a risky asset increases with its variance. (c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference. (d) A less risk-averse investor has a steeper indifference curve for the utility function.arrow_forward2. Stock prices and stand-alone risk Risk is the potential for an investment to generate more than one return. A security that will produce only one known return is referred to as a risk-free asset, as there is no potential for deviation from the known expected outcome. Investments that have the chance of producing more than one possible outcome are called risky assets. Risk, or potential variability in an investment's possible returns, occurs when there is uncertainty about an investment's future outcome, such as the return expected to be generated by the investment and realized by an investor. Generally, investors would prefer to invest in assets that have: O A higher-than-average expected rate of return given the perceived risk O A lower-than-average expected rate of return given the perceived risk Read the following descriptions and identify the type of risk or term being described: Description This type of risk relates to the possibility that a firm will not be able to service its…arrow_forward
- According to the Capital Asset Pricing Model (CAPM), an asset with negative beta: a. Cannot exist b. Is expected to earn a negative return c. Should be short sold d. Will not be included in the market portfolio e. None of the abovearrow_forward18. If one were to plot the expected returns of assets (y axis) against the systematic risk (x-axis) and construct a frontier of investments, then the indifference curves of a risk-neutral investor would: Select one or more: a. Would be straight horizontal lines b. Would be undefined and impossible to plot on such a diagram c. Would increase in utility as you go up along the y-axis d. Would be straight vertical lines e. Coincide over top the efficient frontier boundary at all points f. Would increase in utility as you go left along the x-axisarrow_forwardA reduction in the willingness of investors to take on risk would have what effect on the Security Market Line? A.no effect B.rotate the SML counter clockwise around the risk-free rate C.rotate the SML clockwise around the risk-free rate D.shift the SML upward, parallel to its previous locationarrow_forward
- What can an investor do to avoid momentum crashes? Choose the strategy that avoids momentum crashes as much as possible but which is still expected to earn positive abnormal returns O A. Buy the market portfolio and short-sell loser stocks O B. Buy winner stocks and short-sell value stocks. OC. Buy winner stocks and short-sell the market portfolio. O D. Buy growth stocks and short-sell loser stocks O E. Create a beta-neutral momentum strategy, where the betas of winner and loser stocks are estimated over the previous three years.arrow_forwardWhich of the following is NOT true? O In risk-neutral valuation the risk-free rate is used to discount expected cash flows Options can be valued based on the assumption that investors are risk neutral O None of these (i.e. all are TRUE) O In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate O Risk-neutral valuation provides prices that are only correct in a world where investors are risk- neutral ◄ Previous Next ▸arrow_forwardAn increase in investor risk aversion would be expected to: Increase the Risk-Free Rate while Decreasing the Expected Return on the Market Portfolio. Increase the Risk-Free Rate while Increasing the Expected Return on the Market Portfolio. Decrease the Risk-Free Rate while Decreasing the Expected Return on the Market Portfolio. Decrease the Risk-Free Rate while Increasing the Expected Return on the Market Portfolio. There is not enough information to determine how the Risk-Free Rate and Expected Return on the Market Portfolio will change. None of the above answers is correct.arrow_forward
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