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:

Ingredient

A component or element that is part of a larger mixture, recipe, or formula.

Categorical Proposition

A logical statement that relates two categories or classes in terms of inclusion, exclusion, or partial inclusion.

Universal

In logic, a universal statement is one that asserts something about every member of a particular category.

Negative Premise

A statement in an argument that denies a certain condition or asserts the absence of something.