Aziz Equipment Co

Multiple Choice

Aziz Equipment Co. invests in a group of risky projects, which increases the unsystematic risk of the firm, but does not change the systematic risk of the firm. All else the same, the expected risk premium on its common stock is most likely to:

A) Increase, because the difference between the expected return on the firm's stock and the risk-free rate will widen.
B) Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will narrow.
C) Remain unchanged, because the level of systematic risk is unchanged.
D) Increase or decrease, depending on the internal rate of return of the new projects.
E) Decrease, because the difference between the expected return on the firm's stock and the risk-free rate will widen.