Foundations of Financial Management Study Set 5
Quiz 13: Risk and Capital Budgeting
Projects That Are Negatively Correlated
Projects that are negatively correlated: A) increase the maximum profit potential for the firm. B) increase the possible losses of the firm. C) are generally in the same industry. D) provide a degree of risk reduction.
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The concept of being risk averse means: A) for a given situation investors would prefer relative uncertainty to certainty. B) investors would prefer investments with high standard deviations and greater opportunity for gain. C) that the higher the risk the lower the expected return must be. D) investors prefer low risk to high risk investments.
Which investment has the least amount of risk? A) Standard deviation = $800, expected return = $400 B) Standard deviation = $700, expected return = $3,000 C) Standard deviation = $1,000, expected return = $8,000 D) Standard deviation = $1,000, expected return = $7,000
In a portfolio, risk is evaluated in a different way than with an individual project. In evaluating portfolio risk we: A) need to consider the impact of a given project on the overall risk of the firm. B) recognize that a risky investment always creates a portfolio with less risk. C) need to ensure all the projects in the portfolio are positively correlated. D) only consider the average beta.
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