Question

Which of the following is not true?

Select one:

a.

If the risk free rate is 2% and the market risk premium is 6%, then the expected return is 14% for a security with a beta of 2.

b. If a project’s cash flows are uncertain then the present value discount rate should be higher than the risk free rate.

c.
The beta of a capital budgeting project should be appropriate to its risk.

d.
All of THESE are true

Answer 1

answer is D = All of these are true

a) true

Expected return = Risk free rate + (beta * market risk premium)

14% = 2 + (2 * 6%)

14% = 2 + 12

14% = 14 %

b) true (if the investment cashflows are uncertain there is risk but there is no risk in investment with risk free retrn. so if a project cahflows are uncertain the discount rate should be higher than the risk free rate)

c) true (if beta is zero the project is riskless so the beta of capital budgeting project should be appropriate to its risk)

d) all of these are true (above three options are true so we can select option D)