The cost of capital should be used to evaluate individual investment projects, but should not be used to evaluate the performance of a division or an entire firm

Select one:

True

False

Investment A has an expected return of 14% with a standard deviation of 4%, while investment B has an expected return of 20% with a standard deviation of 9%. Therefore

Select one:

a. risk averse investor will definitely select investment A because the standard deviation is lower

b. a rational investor will pick investment B because the return adjusted for risk (20% - 9%) is higher than the return adjusted for risk for investment A ($14% - 4%)

c. rational investors could pick either A or B, depending on their level of risk aversion

d. it is irrational for a risk-averse investor to select investment B because its standard deviation is more than twice as big as investment As, but the return is not twice as big

Stock A has a beta of 1.2 and a standard deviation of returns of 14%. Stock B has a beta of 1.8 and a standard deviation of returns of 18%. If the risk-free rate of return increases and the market risk premium remains constant, then

Select one:

a. the required returns on stocks A and B will both increase by the same amount

b. the required return on stock B will increase more than the required return on stock A

c. the required returns on stocks A and B will not change

d. the required return on stock A will increase more than the required return on stock B