Question

1. True/ False ?

a) Diversification reduces the market risk of a portfolio.

b) For a given level of expected returns, the primary goal of investors is to minimize the beta of their portfolio.

c) In an MM world, WACC equals the return on assets.

d) After-tax WACC should be used as a discount rate for a firm’s average project.

Answer 1

1. True- Diversification reduces the market risk of a portfolio. One should not put all the eggs in one basket beacuse of the voltility of the market. Therefore, it is important that we diversify our risk by investing in mutiple securities to minimize the loss.
2. False - It is not true that For a given level of expected returns, the primary goal of investors is to minimize the beta of their portfolio.
3. False- WACC equals the unlevered cost of equity as per Modigliani–Miller theory
4. After-tax WACC should be used as a discount rate for a firm’s average project. the tax is reduced from the Cost of Debt component.