TRUE or FALSE Question

1. Unsystematic risk cannot be avoided if you wish to participate in the financial markets.

2. The risk premium for an individual security is computed by multiplying the security's beta by the risk-free rate of return.

3. The efficient set of portfolios contains the portfolio combinations with the highest return and risk.

4. The current market value plus the dividend yield on a security is called the total return.

5. The average compound return earned per year over a multi-year period is called the arithmetic average return.

6 The Modigliani-Miller Proposition states that a firm cannot change the total value of its outstanding securities by changing its capital structure proportions.

7 If the returns of two risky stocks move perfectly with one another your portfolio will have no diversification benefit.

8. A general rule for managers to follow is to set the firm's capital structure such that the firm's bondholders are made well off.

9. The reason that MM Proposition I does not hold in the presence of corporate taxation is because levered firms pay less taxes compared with identical unlevered firms.

10. MM Proposition I with corporate taxes states that by decreasing the debt-to-equity ratio, the firm can increase its total value.

11. MM Proposition I with taxes is based on the concept that the optimal capital structure is the one that is totally financed with equity.