If the Firm Is Being Operated So as to Maximise

question 43

Multiple Choice

If the firm is being operated so as to maximise shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

• A) If the beta of the asset is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
• B) If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
• C) If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
• D) If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
• E) None of the above is a true statement.

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Definitions:

Unit Change

A term describing the effect of a one-unit increase in the independent variable on the dependent variable in the context of statistical models, particularly regression analysis.

Regression Assumptions

Conditions that must be met for the regression analysis results to be valid, including linearity, independence, homoscedasticity, and normality of residuals.

F Distribution

A probability distribution that arises in the testing of whether two population variances are equal and in the analysis of variance (ANOVA) for comparing means among more than two groups.

Coefficient of Multiple Determination

A statistic that quantifies the proportion of variance in the dependent variable that is predictable from the independent variables, commonly used in multiple regression analysis.