A Firm Which Is Faced with Hard Rationing

question 80

Multiple Choice

A firm which is faced with hard rationing:

• A) Has more capital funds available than it has positive net present value projects and thus must decide what to do with the excess funds.
• B) Allocates a fixed amount of capital funds to each of its divisions on an annual basis.
• C) Must decide how to allocate its limited capital funds among numerous positive net present value projects.
• D) Must decide how to allocate its limited capital funds among various business units.
• E) Has no capital funds available to finance a positive NPV project.

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Definitions:

Unsystematic Risks

The portion of risk in an investment that is attributable to the specific circumstances of an individual company or industry.

Efficient Frontier

A concept in portfolio theory where an investment portfolio is said to be efficient if it offers the highest expected return for a given level of risk.

Volatility

A statistical measure of the dispersion of returns for a given security or market index, indicating how much the price of a security, derivative, or index fluctuates.

Stock Betas

An index for determining the degree of volatility, or built-in risk, that a security or a portfolio encounters in comparison with the market at large.