If risk is to be analyzed in a qualitative way, place the following investment decisions in order from the lowest risk to the highest risk New b. New market c. Repair of old machinery d. New product in a foreign market e. New product in a related market f. Add ition to a new product line Referring to Table 13-3, the following order would be correct repair old machinery(c) new equipment(a) addition to normal product line(f) new product in related market(e) completely new market(b) new product in foreign market(d) 13-6 Assume a company, correlated with the economy, is evaluating six projects, of hich two are positively correlated with the economy, two are negatively correlated, and two are not correlated with it at all. Which two projects would you select to minimize the company s overall risk? In order to minimize risk, the firm that is positively correlated with the economy should select the two projects that are negatively correlated with the economy 13-7 Assume a firm has several hundred possible investments and that it wants to om alyze the risk-return trade-off for portfolios of 20 projects. How should it ceed with the evaluation? The firm should attempt to construct a chart showing the risk-return characteristics for every possible set of 20. By using a procedure similar to indicated in Figure 13-11. the best risk-return trade-offs or efficient frontier can be determined We then can decide where we wish to be along this line 13-8. Explain the effect of the risk-return trade-off on the market value of common High profits alone will not necessarily lead to a high market value for common stock. To the extent large or unnecessary risks are taken, a higher discount rate and lower valuation may be assigned to our stock by attempting to match the appropriate levels for risk and return can we hope to maximize our overall value in the market CopyrightC 2005 by The McGray-Hill Companies, Inc. S-478Copyright © 2005 by The McGraw-Hill Companies, Inc. S-478 13-5. If risk is to be analyzed in a qualitative way, place the following investment decisions in order from the lowest risk to the highest risk: a. New equipment. b. New market. c. Repair of old machinery. d. New product in a foreign market. e. New product in a related market. f. Addition to a new product line. Referring to Table 13-3, the following order would be correct: repair old machinery (c) new equipment (a) addition to normal product line (f) new product in related market (e) completely new market (b) new product in foreign market (d) 13-6. Assume a company, correlated with the economy, is evaluating six projects, of which two are positively correlated with the economy, two are negatively correlated, and two are not correlated with it at all. Which two projects would you select to minimize the company's overall risk? In order to minimize risk, the firm that is positively correlated with the economy should select the two projects that are negatively correlated with the economy. 13-7. Assume a firm has several hundred possible investments and that it wants to analyze the risk-return trade-off for portfolios of 20 projects. How should it proceed with the evaluation? The firm should attempt to construct a chart showing the risk-return characteristics for every possible set of 20. By using a procedure similar to that indicated in Figure 13-11, the best risk-return trade-offs or efficient frontier can be determined. We then can decide where we wish to be along this line. 13-8. Explain the effect of the risk-return trade-off on the market value of common stock. High profits alone will not necessarily lead to a high market value for common stock. To the extent large or unnecessary risks are taken, a higher discount rate and lower valuation may be assigned to our stock. Only by attempting to match the appropriate levels for risk and return can we hope to maximize our overall value in the market