If the Firm Is Being Operated So as to Maximize

question 192

Multiple Choice

If the firm is being operated so as to maximize 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:

Contingent Reflex

A reflex action that depends on specific conditions or stimuli to occur, rather than happening automatically.

Conditioned Stimulus

A stimulus that initially does not elicit a specific response but comes to do so after being associated with an unconditioned stimulus.

Conventional Structure

A traditional or commonly accepted arrangement, pattern, or organization of something.

Correlated Stimulus

A stimulus that is consistently linked with another, often leading to an expectation of the second when the first is presented.