The Reason Why Retained Earnings Have a Cost Equal to Rs

question 75

True/False

The reason why retained earnings have a cost equal to rs is because investors think they can (i.e., expect to) earn rs on investments with the same risk as the firm's common stock, and if the firm does not think that it can earn rs on the earnings that it retains, it should pay those earnings out to its investors. Thus, the cost of retained earnings is based on the opportunity cost principle.

Understand and calculate standard deviations, covariances, and correlation coefficients for investment returns.

Comprehend the principles of designing risky portfolios, including the calculation of expected returns and optimal risky portfolio proportion.

Grasp the concepts of complete portfolio and the capital market line.

Understand and apply Tobin's separation property in portfolio selection.

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