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:

Normal Distribution

A symmetric probability distribution centered around the mean, indicating that events close to the mean occur more often than those at a distance.

α

Denotes the level of significance in hypothesis testing, representing the probability of rejecting the null hypothesis when it is actually true.

Z Statistic

A type of standard score that indicates the number of standard deviations a datum is from the mean of a distribution, used in significance testing.

One-tailed Test

A statistical hypothesis test in which the region of rejection is on only one side of the sampling distribution.