Which of the following is/are TRUE?
I. The net present value method assumes that cash flows are reinvested at the firm’s cost of capital, whereas the internal rate of return method assumes that cash flows are reinvested at the computed internal rate of return.
II. The payback period of an investment is defined as the number of years required for the cumulative cash flows from a project to equal the initial outlay.
III. Perfectly negatively correlated describes two negatively correlated stocks that have a correlation coefficient of -1.
IV. With a perfect positive correlation of returns between two securities, there will always be some proportion of the securities that will result in the complete elimination of portfolio risk.
V. Assume that capital asset pricing model holds. Then, a security whose expected return falls above the SML (security market line) indicates that the security is undervalued, whereas a security whose expected return falls below the SML indicates that the security is overvalued.