Question

Question 10

When evaluating two independent investments, the NPV approach is a reliable capital budgeting technique without any potential problems.

a. True

b. False

Question 13

Which of the following statements about portfolio is not true?

a. The expected return of a portfolio is the weighted average of the expected returns of all individual stocks in the portfolio.

b. Portfolio risk is the weighted average of the standard deviations of all individual stocks in the portfolio.

c. Portfolio beta is the weighted average of the beta values of all individual stocks in the portfolio.

Answer 1

1. The correct answer is True

Net Present Value Explanation: Net Present value refers to the present value of all the cash flow that the machine is going to generate in future. To compute Net present value, we first calculate the present value of discount factor which is WACC using formulae = 1/(1+Rate)^Number of Year. After this, we multiply Present Value of discount factor by cash flows generated of each year. Then , The addition of all these cash flow is Net Present Value.

The Net present value is Reliable because it assumes that the cash flows are reinnvested at Cost of capital which is not the case with the Internal rate of return.

2. The correct answer is Option B

The standard deviation of the portfolio is simply not the weighted average but it also takes the correlation into factor while portfolio beta and return is the weighted average.