6. Which of the following statements is incorrect?A. The expected risk premium on each investment is proportional to its beta.B. Securities with a higher market risk require a higher expected return.C. The stock beta measures the sensitivity of a stock's return to the return onthe market portfolio.D. If the correlation of the stock returns in your stock portfolio increases overtime, then the variance of the portfolio return will decrease over time.E. None of the above7. Which of the following correctly ranks the various asset classes in the UnitedStates according to their historical average risk premium (i.e. from low to high riskpremium)?A. S&P 500 < long term government bonds < Treasury bills < small firms <corporate bondsB. Treasury bills < corporate bonds < long term government bonds < smallfirms < S&P 500C. Treasury Bills < long term government bonds < corporate bonds < S&P500 < small firmsD. Long term government bonds < Treasury bills < corporate bonds < S&P500 < small firmsE. None of the above

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Answered: 6. Which of the following statements is…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

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You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: Suppose a risk-free asset has an expected return of 5%. By definition, its standard deviation is zero, and its correlation with any other asset is also zero. Using only Asset A and the risk-free asset, plot the attainable portfolios.
You have been hired at the investment firm of Bowers Noon. One of its clients doesnt understand the value of diversification or why stocks with the biggest standard deviations dont always have the highest expected returns. Your assignment is to address the clients concerns by showing the client how to answer the following questions: d. Construct a plausible graph that shows risk (as measured by portfolio standard deviation) on the x-axis and expected rate of return on the y-axis. Now add an illustrative feasible (or attainable) set of portfolios and show what portion of the feasible set is efficient. What makes a particular portfolio efficient? Dont worry about specific values when constructing the graphmerely illustrate how things look with reasonable data.
Market equity beta measures the covariability of a firms returns with all shares traded on the market (in excess of the risk-free interest rate). We refer to the degree of covariability as systematic risk. The market prices securities so that the expected returns should compensate the investor for the systematic risk of a particular stock. Stocks carrying a market equity beta of 1.20 should generate a higher return than stocks carrying a market equity beta of 0.90. Nonsystematic risk is any source of risk that does not affect the covariability of a firms returns with the market. Some writers refer to nonsystematic risk as firm-specific risk. Why is the characterization of nonsystematic risk as firm-specific risk a misnomer?

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