Q7 a) Which ONE of the following statements underpins the rationale behind the CAPM method...
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Finance
Q7
a) Which ONE of the following statements underpins the rationale behind the CAPM method of estimating the cost of equity?
Only unique risk is rewarded.
Only market risk is rewarded as unique risk can be diversified away.
Only unsystematic risk is rewarded as it cannot be diversified away.
Only diversifiable risk is rewarded as it affects total risk.
b)
Which of the following statements are FALSE.
Investors prefer diversified portfolios because they are less risky.
Diversification with a large number of securities completely eliminates risk
The risk of a well diversified portfolio depends on the unique risk of the individual stocks.
For a well-diversified portfolio, only market risk matters
c) A firm has a beta of 0.8, the relevant market return is 12% and the risk free rate is 3%. What is the cost of equity for the firm? Express your answer as a percentage rounded to 2 decimal places, eg. 5.55.
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