Question

The x-axis should be labeled... a. Expected return. b. Standard deviation. e. Coefficient of variation d. Beta. e. None of the above Which of the following statements is CORRECT? a. If a project has normal cash flows, then its IRR must be positive. b. If a project has normal cash flows, then its MIRR must be positive. c. If a project has normal cash flows, then it can have two NPVs. d. If a project has normal cash flows, then it can have two IRRs. e. If a project has normal cash flows, then it cannot have two IRRs. vi. Which of the following statements is CORRECT? a. The beta of a stock cannot be negative. b. The beta of a portfolio cannot be negative. c. Assuming investors are well-diversified, standard deviation is a great way to measure the risk of a stock. d. Assuming investors are well-diversified, standard deviation is a great way to measure the risk of a portfolio. e. None of the above.

Answer 1

Ans IV

The answer should be option A Expected return , since the curve represented is a risk and return curve , it has a positive slope since it shows as the risk increases the expected return on a portfolio/ stock also increases

Ans V

The answer should be E If the project has normal cash flows i.e the cash flows are not irregular and initial outlay exists with subsequent inflows in the future periods it can never have 2 IRR .

To explain the concept further a negative IRR indicates that the sum of post-investment cash flows is less than the initial investment; i.e. the non-discounted cash flows add up to a value which is less than the investment which is also possible in a normal cash flow project hence A and B are incorrect

Also always keep in mind that a normal cash flow project will always have only 1 NPV , hence option C is also wrong

Ans VI

Ans is D Standard deviation in case the investor is well diversified is used to measure the risk of the portfolio

answer A and B are wrong since beta can be negative since beta only shows a relationship of the stock/ portfolio with the market and a -ve beta indicates a opposite direction movement of the stock or portfolio . hence a -ve beta is always possible

answer c is wrong because when the investor is well diversified the standard deviation is used to measure the risk of the portfolio and not the stock