Table 12.3 Tangshan Mining Company Is Considering Investment in One of Two

question 56

Multiple Choice

Table 12.3
Tangshan Mining Company is considering investment in one of two mutually exclusive projects M and N which are described below. Tangshan Mining's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40.
-Which of the following statements is most correct?

• A) Because a business firm can be viewed as a portfolio of assets, it is important that the firm maintain a diversified portfolio of investments in order to reduce firm diversifiable risk.
• B) Firm's are rewarded for choosing and implementing from among a diversifiable collection of projects through higher stock values.
• C) Firms generally are not rewarded for choosing and implementing from among a diversifiable collection of projects through higher stock prices.
• D) Two of the above are true.

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Definitions:

Relative Change

Relative Change represents the ratio of the change in a quantity to the original amount, often expressed as a percentage to indicate how much something has increased or decreased relative to its initial value.

Coefficient Of Correlation

A numerical measure that represents the strength and direction of a linear relationship between two variables.

Covariance

A measure indicating the extent to which two variables change together, revealing whether an increase in one variable tends to be accompanied by an increase (positive covariance) or decrease (negative covariance) in the other.

Distribution

In statistics, a distribution is a function that shows the possible values for a variable and how often they occur.