Question

Fill Blanks 8 pts We learn three types of risk in the class: total risk, non-diversifiable risk, and diversifiable risk. Which type of risk is related to each of the situations below? What type of risk does standard deviation measure? What type of risk does beta measure? Firm specific risk is also called? Required return is because of bearing which type of risk? -- True or False 12 pts Payback period ignores time values of cash flows. Always accept the project with IRR larger than required return. IRR always provides the same decision as NPV does. Fundamental analysis doesn't help you get advantage in semi-strong form efficient market. ( Technical analysis helps you get advantage in the weak form efficient market. Inside information helps you get advantage in the strong from efficient market.

Answer 1

Standard deviation measures total risk.

Beta measures diversifiable risk.

Firm specific risk is also called non-diversifiable risk.

Required return is for bearing total risk.

True. Payback period ignores time value because cash flows are not discounted.

False. NPV creates value for shareholders. Accept projects with positive NPV.

False. IRR and NPV do not always provide the same decision.

True. In a semi-strong form efficient market, fundamental analysis does not provide any advantage.

False. In a weak form efficient market, technical analysis does not provide any advantage.

False. In a strong form efficient market, inside information does not provide any advantage.