4- The major reason why financial players engage in diversification is to a) O reduce the volatility of a portfolio's return. 037 b) O raise the volatility of a portfolio's return. raise the average return on a portfolio. d) reduce the average return on a portfolio.

4- The major reason why financial players engage in diversification is to a) O reduce the volatility of a portfolio's return. 037 b) O raise the volatility of a portfolio's return. raise the average return on a portfolio. d) reduce the average return on a portfolio.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 8MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...

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q4- What causes the fact that, for a given level of return, large portfolios of investments have less risk than individual shares? Select one: a. Unsystematic risk. b. Systematic risk. c. Market risk. d. Common risk.
Please answer both QUESTION 7 According to the capital asset pricing model (CAPM), fairly priced securities should have A. A non-zero alpha. в.A fair return based on the level of systematic risk. C. A fair return based on the level of unsystematic risk. D.A beta of 1. QUESTION 8 Diversification can increase fair return. True False
1) Please indicate whether the following statements are true or false. In case of a false statement, briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.
4. The Security Market Line (SML) is: a. the line that describes the expected return-beta relationship for well diversified portfolios only. b. also called the Capital Allocation Line. c. the line that is tangent to the efficient frontier of all risky assets. d. the line that represents the expected return beta relationship. e. the line that represents sthe relationship between an individual security's return and the market's return.
q1- Which of the following statements about the difference between investing in a large portfolio and investing in individual shares is true? Select one: a. For a given level of risk, an investment in a large portfolio will have less return than an investment in a single share. b. For a given level of return, an investment in a large portfolio will have less risk than an investment in a single share. c. For a given level of return, an investment in a large portfolio will have more risk than an investment in a single share. d. We cannot draw any firm conclusions. For a given level of return, Individual shares may have more or less risk than a large portfolio, depending on the individual share and depending on the portfolio.
5) Which of the following statement(s) is(are) false regarding the selection of a portfolio from those that lie on the capital allocation line? 1.I) Less risk-averse investors will invest more in the risk-free security and less in the optimal risky portfolio than more risk-averse investors. 2.II) More risk-averse investors will invest less in the optimal risky portfolio and more in the risk-free security than less risk-averse investors. 3.III) Investors choose the portfolio that maximizes their expected utility. A) I only B) II only C) III only D) I and III E) II and III Justify the correct answer.
This question relates to the two types of risk and to diversification. a)What is specific risk? b)What is market risk? c)What is meant by diversification? d)Explain why diversification is a useful tool to manage specific risk but not market risk. Be sure you answer clearly both why diversification can help manages specific risk as well as why it is not useful in managing market risk. e)Approximately how many stocks in a portfolio do you need to be fully diversified?
1. The diversifiable risk of a portfolio: a. Is correlated with systematic risk. b. Can be made sufficiently small. c. Is zero in the real world. d. Is the risk that investors lose because of transaction costs. Which one of the following conditions determines the investor’s overall optimal portfolio? a. The marginal ratio of substitution of the investor’s utility function must be equal to the Sharpe ratio of the optimal risky portfolio. b. The standard-deviation of the overall portfolio in minimised. c. The expected return of the overall portfolio is maximised. d. The slope of the Sharpe-ratio is equal to zero. 4. Markets can never be strong-form efficient because: a. There are too many traders in them. b. Investors are rational. c. Information is costly to acquire. d. All information is public. 5. Which one of the following is not a property of a pure arbitrage portfolio? a. Zero investment. b. Zero systematic risk. c. Positive net return. d. All of the above.
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37 - An increase in investor risk aversion would be expected to: Increase the Risk-Free Rate while Decreasing the Expected Return on the Market Portfolio. Increase the Risk-Free Rate while Increasing the Expected Return on the Market Portfolio. Decrease the Risk-Free Rate while Decreasing the Expected Return on the Market Portfolio. Decrease the Risk-Free Rate while Increasing the Expected Return on the Market Portfolio. There is not enough information to determine how the Risk-Free Rate and Expected Return on the Market Portfolio will change. None of the above answers is correct.
Which of the following statements is true? A. Because of flotation costs, dollars raised by retaining earnings must work harder than dollars raised by selling new shares. B. All other things being equal, a call option price will increase, and a put option price will decrease if an exercise price increases. C. Security market line (SML) plots return against total risk which is measured by the standard deviation of returns. D. Because potential long-term returns, income from rent-payments, diversification, and inflation hedge, real-estate would be a good investment.
QUESTION 4 The statement "A portfolio is less than the sum of its parts." means a diversified group of assets will be less volatile than the individual assets within the group. for reasons that are not well understood, the value of a portfolio is less than the sum of the values of its components. it is less expensive to buy a group of assets than to buy those assets individually. portfolio returns will always be lower than the returns on individual stocks.