QUESTION 21

Statement A: You have no outside income. You have very accurate data on the security market (i.e. your firm has purchased a subscription to the true mean and covariance provision service). With this accurate data you calculate the tangency portfolio using mean variance analysis. Your investment advisor reminds you that the tangency portfolio is the portfolio with the highest Sharpe ratio. Because of this high Sharpe ratio one such as yourself with no outside income should invest all one's money in the tangency portfolio, forgoing all other financial assets.

Statement B: In a discounted cash flow analysis, we often estimate the terminal value of a firm or project using a growing perpetuity. It is possible that firms with good management could have higher growth rate than the market or industry average growth rate forever.

Are statement A and B true or false?

A. A: True, B: True

B. A: True, B: False

C.A: False, B: False

D.A: False, B: True