Table 12.3 Tangshan Mining Company Is Considering Investment in One of Two

Multiple Choice

Table 12.3
Tangshan Mining Company is considering investment in one of two mutually exclusive projects M and N which are described below. Tangshan Mining's overall cost of capital is 15 percent, the market return is 15 percent and the risk-free rate is 5 percent. Tangshan estimates that the beta for project M is 1.20 and the beta for project N is 1.40.
-Which of the following statements is most correct?

A) Because a business firm can be viewed as a portfolio of assets, it is important that the firm maintain a diversified portfolio of investments in order to reduce firm diversifiable risk.
B) Firm's are rewarded for choosing and implementing from among a diversifiable collection of projects through higher stock values.
C) Firms generally are not rewarded for choosing and implementing from among a diversifiable collection of projects through higher stock prices.
D) Two of the above are true.