Question

QUESTION 4 (20 Indicate each of the following statements True or False. No explanation is required.

(a) The best fit line of a pairwise plot (linear regression line) of the returns of the security against the market index returns is called the Security Market Line.

(b) If the risk of an investment project is significantly different than the firm's risk, the financial manager should still use the discount rate for the project based on the firm's risk for discounting the future cash flows.

(c) Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have high betas.

(d) The formula for calculating beta is given by dividing the covariance of the stock return with the market portfolio return by the variance of the market portfolio return.

Answer 1

Question

The best fit line of a pairwise plot (linear regression line) of the returns of the security against the market index returns is called the Security Market Line.

Answer : False

Question

If the risk of an investment project is significantly different than the firm's risk, the financial manager should still use the discount rate for the project based on the firm's risk for discounting the future cash flows.

Answer : False

Question

Firms whose revenues are strongly cyclical and whose operating leverage is high are likely to have high betas.

Answer : True

Question

The formula for calculating beta is given by dividing the covariance of the stock return with the market portfolio return by the variance of the market portfolio return

Answer : True