Which of the Following Statements Is CORRECT

question 146

Multiple Choice

Which of the following statements is CORRECT?

• A) Logically, it is easier to estimate the betas associated with capital budgeting projects than the betas associated with stocks, especially if the projects are closely associated with research and development activities.
• B) The beta of an "average stock," which is also "the market beta," can change over time, sometimes drastically.
• C) If a newly issued stock does not have a past history that can be used for calculating beta, then we should always estimate that its beta will turn out to be 1.0.This is especially true if the company finances with more debt than the average firm.
• D) During a period when a company is undergoing a change such as increasing its use of leverage or taking on riskier projects, the calculated historical beta may be drastically different from the beta that will exist in the future.
• E) If a company with a high beta merges with a low-beta company, the best estimate of the new merged company's beta is 1.0.

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Definitions:

Health Insurance

A type of insurance that covers the whole or part of the risk of a person incurring medical expenses, spreading the risk over numerous individuals.

Adverse Selection

A situation in which sellers have information that buyers do not have, or vice versa, leading to an inefficient market outcome.

Moral Hazard

A situation in which there is a tendency to take riskier behavior when protected from the consequences of that behavior, often seen in insurance and finance.

Asymmetric Information

A situation in economics where one party in a transaction has more or better information than the other, leading to potential imbalances in decisions and market outcomes.