QUESTION 17 The primary purpose of portfolio diversification is to: O A. increase returns and risks. O B. eliminate all risks. O C. eliminate asset-specific idiosyncratic risk. O D. eliminate systematic risk. O E. lower both returns and risks. QUESTION 18 Which one of the following should earn the most risk premium based on CAPM? O A. diversified portfolio with returns similar to the overall market O B. stock with a beta of 1.38 O C. stock with a beta of 0.74 OD. U.S. Treasury bill O E. portfolio with a beta of 1.01 QUESTION 19 Thayer Farms stock has a beta of 1.12. The risk-free rate of return is 4.34 percent and the market risk premium is 7.92 percent. What is the expected rate of return on this stock? O A. 8.35 percent O B. 9.01 percent O C. 10.23 percent O D. 13.21 percent O E. 13.73 percent QUESTION 20 Which one of the following statements is correct for a firm that uses debt in its capital structure? O A. The weighted average cost of capital (WACC) should decrease as the firm's debt-equity ratio increases. OB. The firm's WACC will decrease as the corporate tax rate decreases. O C. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share. O D. The WACC will remain constant unless a firm retires some of its debt