True or False (T/F) a. When the correlation coefficient of the two asset’s return is 1,...

True or False (T/F) a. When the correlation coefficient of the two asset’s return is 1, there is the greatest diversification benefit. ( )

b. If the NPV of a project is negative, the project should be accepted ( ).

c. Increase in net working capital indicates cash inflow for a project ( ).

Solutions

Expert Solution

a. When the correlation coefficient of the two asset’s return is 1, there is the greatest diversification benefit. ( F )

Lower the correlation, greater the benefit of diversification in the form of risk reduction. When the correlation coefficient of the two asset’s return is -1 there will be greatest diversification benefit.Thus the above statement is false.

b. If the NPV of a project is negative, the project should be accepted ( F ).

A project should be accepted when the Net Present Value is positive or greater than zero. A project with a negative NPV should not be accepted. Thus the above statement is false.

c. Increase in net working capital indicates cash inflow for a project ( F ).

When net working capital increases then it results in a cash outlfow. Increase in net working capital means the funds are being tied in stock ,debtors etc. A business or project will need these blocked funds back so that it can further grow by investing these funds.Thus the above statement is false.

jeff jeffy answered 1 year ago

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