Question 5 (4 points) According to the following information, which of the stocks would be considered riskiest in a diversified portfolio of investments? Stock Beta ABC FGH MNO TUV Standard Deviation 12.5% 8.0% 20.2% 15.3% 1.0 0.5 2.0 3.0 Stock FGH, because it has the highest s/b ratio Stock TUV, because it has the highest beta. Stock ABC, because its beta is the same as the market beta (1.0) and the market is always very, very risky Stock MNO, because it has the highest standard deviation Question 6 (4 points) 1. Which of the following is not a rationale for using the NPV method in capital budgeting? An NPV of zero signifies that the project's cash flows are just sufficient to repay the invested capital and to provide the required rate of return on that capital. A project whose NPV is positive will increase the value of the firm if that project is accepted. A project is considered acceptable if it has a positive NPV. All of the above are true. Question 7 (4 points) 1. Tara is evaluating two mutually exclusive capital budgeting projects that have the following characteristics Cash Flows Year 0 1 2 Project $(4,000) 0 5,000 Project R $(4,000) 3,500 1,100 IRR 11.8% 12.0% If the firm's required rate of return (1) is 8 percent, which project should be purchased? Both projects should be purchased, because the IRRs for both projects exceed the firm's required rate of return Neither project should be accepted, because the IRRs for both projects exceed the firm's required rate of return Project should be accepted, because its net present value (NPV) is higher than Project R's NPV. Project R should be accepted, because its net present value (NPV) is higher than Project Q's NPV. Question 8 (5 points) What is the standard deviation of return for a stock with annual return of 10%, 9%, -8%, 13% over the last four years