The change from a straight to a kinked capital allocation line is a result of the:a. Reward-to-volatility (Sharpe) ratio increasing.b. Borrowing rate exceeding the lending rate.c. Investor’s risk tolerance decreasing.d. Increase in the portfolio proportion of the risk-free asset.

The change from a straight to a kinked capital allocation line is a result of the:a. Reward-to-volatility (Sharpe) ratio increasing.b. Borrowing rate exceeding the lending rate.c. Investor’s risk tolerance decreasing.d. Increase in the portfolio proportion of the risk-free asset.

Principles of Accounting Volume 2

19th Edition

ISBN:9781947172609

Author:OpenStax

Publisher:OpenStax

Chapter11: Capital Budgeting Decisions

Section: Chapter Questions

Problem 16MC: When using the NPV method for a particular investment decision, if the present value of all cash...

See similar textbooks

Related questions

Q: The ______________on capital is called Cost of capital Select one: a. Average expected return b.…

A: Return on capital is called as cost of capital. Return for investors on capital invested by them is…

Q: Which combination of investment policy and financing policy related to working capital provides the…

A: RELAXED AND CONSERVATIVE Relaxed policy estimates the current assets for achieving the target…

Q: increase a firm’s cost of capital

A: The consideration of a below-average risk project is likely to increase a firm's cost of capital.

Q: Projected free cash flows should be discounted at the firm's weighted average cost of capital to…

A: In this question we are required to tell whether the given the statement is True or False and…

Q: he MM model, as the proportion of debt in the capital structure increases, the cost of equity

A: Modigliani-Miller theorem is based on the value of the firm, with the assumption of no taxes,…

Q: A. When retained earnings are exhausted, the MCC breaks upward. What happens if the firm continues…

A: Retained Earnings refer to that part of net income or profit that is just leftover after making…

Q: As the level of risk increases, the corresponding cost of capital (i.e. the return) must…

A: As there is an increase in the risk level, investors would be demanding a higher return on an…

Q: Which of the following statements is false? (You may select more than one answer.)a. The payback…

A: Cash payback method: Cash payback period is the expected time period which is required to recover…

Q: Which of the following statements are true and which are false? o). High breakeven points in capital…

A: o). High breakeven points in capital intensive industries are desirable. True

Q: Which of the following statements is not correct? The higher the sales growth rate g is, the…

A: Additional fund needed is the amount of money a company needs to raise from its external sources to…

Q: When a lump sum investment shows growth, even if the interest rate stays low, it is known as.. 1-…

A: A lump sum investment is depositing the entire amount at one go.

Q: Suppose an investment has conventional cash flows with positive NPv. How would it impact your…

A: NPV is the net present value of a project. When the net present value of a project is positive in…

Q: On Estimating Risks and Return on Assets * Statement I: Portfolio risk can be reduced by…

A: Risk is an important parameter while making investments which plays a key role in making investment…

Q: Suppose an investment has conventional cash flows with positive NPV. How would it impact your…

A: Net Present Value is Positive of the project. Impact of these measurements on the decision of…

Q: The capital asset pricing model assumes a) all investors are irrational. b) investors have…

A: Capital Asset Pricing Model states that the return on equity shares is determined by the amount of…

Q: Generally, the ____ is considered to be a more realistic reinvestment rate than the ____. a.…

A: Cost of capital is the required rate for make capital budgeting decision

Q: Match the following ✓ A premium over and above the risk-free rate. A. Financial Leverage ✓ The…

A: Answer - Match the Following : Particulars A premium over and above the risk free rate C.…

Q: If the internal rate of return (IRR) is less than the cost of capital, then the investment is…

A: False If the internal rate of return (IRR) is less than the cost of capital, then the investment is…

Q: The capital asset pricing model expresses the cost of equity as a function of a return on riskless…

A: The term capital structure refers to the structure of debt and equity financing in the company. A…

Q: An increase in the riskiness of financial securities results in a_______ in the supply of loanable…

A: The riskiness of financial securities or financial risk is defined as the threat of losing the money…

Q: Which combination of investment policy and financing policy related to working capital provides the…

A: A relaxed current asset investment policy is one under which relatively large amounts of current…

Q: True or False: In solving a capital budgeting problem involving investment opportunities that are…

A: In solving a capital budgeting problem involving investment opportunities that are divisible (i.e.,…

Q: Suppose a firm invest in proects that are much riskier than its average investments. Do you think…

A: A firm funds its investments either with shareholders' equity or debt. One of the major criteria…

Q: Suppose an investment has conventional cash flows with positive NPV. how would it impact your…

A: Conventional cash flow is a cash flow in which an investment or project has an initial cash outflow…

Q: The tendency of the return on stockholders' equity to vary disproportionately from the return on…

A: The return on stockholders' equity refers to the amount given to the shareholders from the total…

Q: Both the capital asset pricing model and the arbitrage pricing theory rely on the proposition that a…

A: The two methods i.e. the CAPM and the APT models are used to analyze the risk and return from the…

Q: The capital asset pricing model (CAPM) The constant–growth model Compute forward-looking expected…

A: The capital asset pricing model (CAPM) The Capital Asset Pricing Model (CAPM) alludes to the…

Q: One of the modern methods of Capital Budgeting is: a. Profitability index O b. Accounting Rate of…

Q: What capital budgeting rule is a simple but imperfect attempt to solve the capital rationing…

A: Answer: Option c. Payback rule Explanation: Payback rule is a very simple method which is used to…

Q: Should the weighted average cost of capital be applied uniformly across the firm to all projects…

A: No, the weighted average cost of capital (WACC) should not be applied uniformly across all the…

Q: Which of the following statements are not true Select one: a. Profitability Index is a discounted…

A: Introduction: All the above statements relate to capital budgeting, which involves making decisions…

Q: This question is related to Chapter 18 of Berk & Demarzo "Capital Budgeting and Valuation with…

A: With constant debt-equity ratioAdjusted Present Value is used to value a firm’s total investment by…

Q: True or False: In solving a capital budgeting problem involving investment opportunities that are…

A: capital budgeting is the process of selection of the best project among all the projects available.…

Q: If the duration gap is zero, then the market value of equity is ____________ interest rates. A.…

A: A zero-gap condition exists when a financial institution's interest rate-sensitive assets and…

Q: why is knowledge of the money market important for carrying out value maximizing working capital…

A: Introduction: For this question, the importance of working capital which helps to manage the short…

Q: One position expressed in the financial literature is that firms set their dividends as aresidual…

A: A residual dividend policy is one where a company uses residual equity to fund dividend payments.…

Q: Which of the following statements is CORRECT? a. WACC calculations should be based on the…

A: Weighted cost of capital (WACC) is the minimum rate of return that company is expected to pay on all…

Q: Over time, a portfolio manager’s cumulated trade implementation shortfall will equal

A: Trade implementation shortfall is Cumulated direct transaction costs and liquidity costs , Cumulated…

Q: Cost of capital O can be calculated with CAPM O is different of the WACC reflects only equity…

A: Solution 1:- Cost of capital means the minimum rate of return required by the fund providers, which…

Q: All else being equal, a company would choose to invest in a capital asset if which of the following…

A: Answer: If the expected accounting rate of return is greater than the required rate of return.

Q: We learned interest rates differ across firms, and it varies with a firm's investment horizons…

A: Borrowers' risk is related to their creditworthiness whenever lender lends the loan they used to…

Question

The change from a straight to a kinked capital allocation line is a result of the:
a. Reward-to-volatility (Sharpe) ratio increasing.
b. Borrowing rate exceeding the lending rate.
c. Investor’s risk tolerance decreasing.
d. Increase in the portfolio proportion of the risk-free asset.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Introduction

VIEW

Answer

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

In general, the the correlation between asset returns, the the risk reduction that investors can achieve by diversifying. O a. lower; lower O b. greater; greater O c. lower; greater d. greater; lower
The Capital Asset Pricing Model (CAPM) asserts that an asset’s expected return is equal to the risk-free rate plus a risk premium for: a. Volatility b. Systematic risk c. Non-systematic risk d. Diversification e. Marginal utility of consumption
according to capm the expected return on equity includes a reward for: a. market risk and specific risk b. Specific risk only c. Time value of money and market risk d. Diversification and portfolio risk e. Time value of money and specific risk
What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed
When using the NPV method for a particular investment decision, if the present value of all cash Inflows Is greater than the present value of all cash outflows, then _______ . A. the discount rate used was too high B. the investment provides an actual rate of return greater than the discount rate C. the investment provides an actual rate of return equal to the discount rate D. the discount rate is too low
As the level of risk increases, the corresponding cost of capital (i.e. the return) must _____________________ . a) go up b) go down c) stay the same.
Explain what is meant by the internal rate of return of an investment and discuss its relationship to the NPV of an investment. Explain the problems posed for the use of the IRR when it is necessary (i) to choose between two investments and when (ii) investments are characterised by negative net cash flows at the end of their lives. Discuss and evaluate the use of the payback period as an investment criterion.
According to the Capital Asset Pricing Model, higher investment risk, however it is measured, translates into higher required rates of return. True False
Methods that ignore the time value of money in capital investment appraisal include which of the following? a. Net present valueb. Discounted payback c. Average rate of return d. All of the above
According to the capital asset pricing model, assets with Lower; lower; unsystematic Higher; higher, unsystematic Lower; higher; unsystematic Higher; higher; systematic Higher; lower; systematic betas have expected returns because betas quantify the degree of risk. Please fill in the blank.
If an investment’s expected return (mean return) does not plot on the SML, what does it show? Identify undervalued/overvalued investments from the graph.
Which of the following investment strategies involves generating a higher expected rate of return through increasing risk? a. Leverage b. Value at risk c. Diversifying d. Hedging risk