Which of the following statements is CORRECT? Assume that the firm is a publicly-owned corporation and is seeking to maximize shareholder wealth.
A) If a firm has a beta that is less than 1.0,say 0.9,this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms' assets.
B) If a firm's managers want to maximize the value of the stock,they should,in theory,concentrate on project risk as measured by the standard deviation of the project's expected future cash flows.
C) If a firm evaluates all projects using the same cost of capital,and the CAPM is used to help determine that cost,then its risk as measured by beta will probably decline over time.
D) Projects with above-average risk typically have higher-than-average expected returns.Therefore,to maximize a firm's intrinsic value,its managers should favor high-beta projects over those with lower betas.
E) Project A has a standard deviation of expected returns of 20%,while Project B's standard deviation is only 10%.A's returns are negatively correlated with both the firm's other assets and the returns on most stocks in the economy,while B's returns are positively correlated.Therefore,Project A is less risky to a firm and should be evaluated with a lower cost of capital.

Question

Quizplus · Accepted Answer

The fact that A's returns are negatively correlated means that it serves as a sort of insurance policy to the firm.The fact that its SD is high is actually good,because the negative correlation will cause the project's beta versus the market and also with the firm's other assets to be relatively low,denoting a low risk and thus justifying a relatively low cost of capital.This answer is theoretically always true,and it is especially true if the firm is large,has many projects,and Project A is not a "bet the company" project.

Which of the Following Statements Is CORRECT? Assume That the Firm