FIN EXAM 2 Pt. 2

_________ measures the amount of systemic risk present in a particular risky asset relative to the systematic risk present in an average risky asset

Besta

Which of the following statements regarding unsystematic risk is accurate

It can be effectively eliminated by portfolio diversification

Which of the following statements is true of a portfolio's standard deviation

It can be less than the weighted average of the standard deviations of the individual securities held in the portfolio

A _______________ is the markets measure of systematic risk

beta of 1

A firms aftertax cost of debt will increase if there is a(n)

decrease in the company's tax rate

When evaluating any capital project proposal, the cost of capital...

depends upon how the funds raised for that project are going to be spent.

To determine a firms cost of capital, one must include

the returns currently required by both debt holders and stockholders

An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so

Reducing the number of stocks held on her stock portfolio

Most financial securities have some level of ____________ risk

Systematic

Which of the following statements best describes the principle of diversification q

Spreading an investment across many diverse assets will eliminate some of the total risk

Assume the firm utilizes the security market line (SML) approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firms cost of equity.

a decrease in the firms beta

To calculate the expected risk premium on a stock, one must subtract the __________ from the stocks expected return

risk-free rate

For any given capital project proposal, the discount rate should be based on the

risks associated with the use of the funds required by the project

When determining a firm's weighted average cost of capital, the item with the least amount of impact is the

standard deviation of the company's common stock

Of the options listed below, which is the best example of systemic risk.

Investors panic causing security prices around the globe to fall precipitously

Which of the following statements regarding the weighted average cost of capital is accurate

it is the return investors require on the total assets of the firm

When determining the firms cost of capital the most important determinant is the

use of the funds raised