Author Question: Suppose a firm is a publicly owned corporation and is seeking to maximize shareholder wealth. Which ... (Read 75 times)

camac77 · **on:** Aug 7, 2023

Suppose a firm is a publicly owned corporation and is seeking to maximize shareholder wealth. Which of the following statements is correct?

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Project A has a standard deviation of expected returns of 30%, while Project B’s standard deviation is only 15%. A’s returns are negatively correlated with both the firm’s other assets and the returns on most stocks in the economy, while B’s returns are positively correlated. Therefore, Project A is less risky to a firm and should be evaluated with a lower cost of capital.

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Projects with below-average risk typically have lower than average expected returns. Therefore, to maximize a firm’s shareholder wealth, its managers should choose high-beta projects over those with lower betas.

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If a firm evaluates all projects using the same cost of capital, and the CAPM is used to help determine that cost, then its risk as measured by beta will probably decline over time.

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If a firm has a beta that is less than 1.0, say 0.7, this would suggest that the expected returns on its assets are negatively correlated with the returns on most other firms’ assets.

risolinick@gmail.com · **Reply #1 on:** Aug 7, 2023

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