Answered: As diversification increases, the…

Business

Finance

As diversification increases, the firm-specific risk of a portfolio approaches A. 1. B. infinity. C. 0. D. (n – 1) × n.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 21P

See similar textbooks

Related questions

Q: Portfolio Management A particular firm’s portfolio is composed of two assets, which we will call" A"…

A: Hi, since multiple subparts are posted, I will answer the first 3, as per guidelines. Please repost…

Q: Which of the following is a false statement of the market price of risk found in the Capital Market…

A: Portfolios that blend risk and return optimally are represented by the capital market line (CML).…

Q: c. What is the "firm-specific" risk of portfolio Q? (Calculate using numbers in decimal form, not…

A: Given: Constant Beta Standard deviation Proportions A 4.00% 0.5 26% 0.7 B -1.20% 0.7 18%…

Q: Which of the following measures reflects the excess return earned on a portfolio per unit of its…

A: Treynor's measure is the measure of excess return earned per unit of beta of portfolio. Treynor…

Q: The capital allocation line provided by a risk-free security and N risky securities is A. the line…

A: Introduction: Capital market line is nothing but the optimal mix of different risks and returns.…

Q: Which of the following statements regarding non-systematic risk, systematic risk and total risk…

A: Systematic risk is the risk derived from the market and which is measured by the beta of the stock…

Q: Assume CAPM holds. Consider a portfolio that consist of a risk-free asset and two risky assets A and…

A: M = 0.5A +0.5B µM = 11% σA = 20% σB = 40% ρAB = 0.75 Risk-free rate=2%…

Q: 7. The utility score a typical investor would assign to a particular portfolio, other things equal,…

A: The utility score of an investor depends on return and total risk. The Capital Market Line shows the…

Q: Which is the best measure of risk for a single asset held in isolation, and which is the best…

A: Answer - Coefficient of variation shall be regarded as the best measure of risk for a single…

Q: 1. The diversifiable risk of a portfolio: a. Is correlated with systematic risk. b. Can be made…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: As additional securities are added to a portfolio, total risk will generally ________ at a _________…

A: Portfolio is a bunch of various assets or securities. To reduce or manage the risk, investors invest…

Q: In measuring the performance of a portfolio, the time-weighted rate of return is superior to the…

A: Note we have two different type of measurement return of portfolio manager Time weighted rate of…

Q: Identify the FALSE statement a. Where two securities are perfectly positively correlated, there is…

A: In order to reduce the risk investors generally invest in more than one security, so that if there…

Q: It is a risk adjusted performance measure that represents the average return on a portfolio. a.…

A: Correct answer is (a) sharp ratio

Q: Use the following CAPM equation for a portfolio to answer the questions that follow: E(RP) = RF + βP…

A: Here, E(RP) is 4.2% RF is 1 % βP is 0.8 RM is 5% Actual Portfolio Return is 6%

Q: Value-at-risk (VaR) can be defined as: Group of answer choices A. The highest value of a portfolio…

A: Portfolio refers to basket of different financial assets in which investment is made by single…

Q: As one adds more assets to a portfolio in order to achieve diversification, the portfolio's risk? O…

A: Diversification is a process in which investors add more assets which are not well correlated to…

Q: Consider the one-factor APT. Assume that two portfolios, A and B, are well diversified. The betas of…

A: values provided in the question is as follows: portfoilo beta expected return A 0.2 9% B 1.2…

Q: . The difference between the expected (c equired) return for the market portfolio ar he risk-free…

A: This pertains to the CAPM (capital asset pricing model). The difference between expected return on a…

Q: As the number of securities in a portfolio is increased, what happens to the average portfolio…

A: Standard Deviation: It is a statistical measure of dispersion and measures the dispersion in the…

Q: Which of the following statements is true regarding the optimal risky portfolio: It is designated…

A: A group of financial assets such as stocks, bonds, commodities, cash, and cash equivalents, as well…

Q: Beta is which of the following: A) standard deviation. B) total risk. C) Beta is the relationship…

A: option C is correct Beta is the relationship which is between an investment's return, and the…

Q: Portfolio theory tends to define risky investments in terms of just two factors: expected returns…

A: Since, you asked multiple questions, we will answer first question for you as per guidelines. Kindly…

Q: A stock's risk has a component called _____________________, which can be minimized as we add more…

A: Systematic risk is the risk that refers to entire market and it is not avoidable. this risk arises…

Q: Diversification refers to the _________. a. reduction of the stand-alone risk of an individual…

A: diversification recuses the unsystemic risk of an individual stock by including other stocks in the…

Q: State whether the Portfolio Nature is Defensive/Aggressive. Weight on XOM Weight on PFE Portfolio…

A: A defensive portfolio is made up of equities that have a low beta. The equities in this portfolio…

Q: For a market timer, the ________ will be higher when the market risk premium is higher Select one:…

A: The portfolio beta will be reflective of the systematic risk associated with a particular asset and…

Q: The security market line depicts: a. Expected return as a function of systematic risk (indicated…

A: The security market line (SML) is a graphical representation of the capital asset pricing model…

Q: Which of the following correlation coefficients will produce the most diversification benefits when…

A: A correlation coefficient is a measure to determine the degree of association between two variables.…

Q: What is a risk measure? a Alpha b Required return on the market portfolio c Standard deviation of…

A: Risk measures are factual measures that are chronicled indicators of speculation hazard and…

Q: need help

A: Under one factor model:E(R) = Rf + Beta x Z where E(R) = expected return of a security, Rf = risk…

Q: When a portfolio consists of only a risky asset and a risk-free asset, increasing the fraction of…

A: Principally, it is an established rule that higher the risk, higher the return.

Q: The CAPM states that the expected (required) return on an asset is : E(Ri)=Rf+βi[E(RM)−Rf] where…

A: The Market portfolio will be reflective of a portfolio which has completely eliminated all the…

Q: Suppose you plan to form your overall investment portfolio in two steps: STEP 1: Choose a portfolio…

A: The Portfolio frontier: A portfolio frontier is constructed by using various combinations (weights)…

Q: The measure of risk for a security held in a diversified portfolio is:a. Specific risk.b. Standard…

A: the standard deviation of returns is the measure of risk which measures the dispersion of variables.…

Q: can be progressively eliminated by adding stocks to a portfolio? Systematic risk Specific risk…

Q: Return on a portfolio of two risky assets which are perfectly negatively correlated is equivalent to…

A: Two assets which are having negatively correlated which means risk can be can be reduced to zero.…

Q: The portfolio with the highest Sharpe Ratio is I. The minimum-variance point on the efficient…

A: Sharpe ratio refers to the measurement of the risk-adjusted returns of the financial portfolio.…

Q: Indicate whether its True or False. Then write the explanation! In the presence of diversification…

A: By diversifying a portfolio, only unsystematic risk is diversified systematic risk risk remains the…

Q: The concept of Portfolio Effect indicates that the more assets added to the portfolio, the less risk…

A: Portfolio means collection of various financial investments. Such investments can be in mutual…

Q: Which statement about portfolio diversification is correct?a. Proper diversification can reduce or…

A: Portfolio diversification is the process of risk management by investing in numerous securities to…

Q: Beta is a measure of? Risk in a well diversified portfolio Systematic risk The extent to which the…

A: Beta is measure of stocks movement or volatility in respect to market. Stocks with higher beta are…

Q: Portfolio risk is comprised of risk risk. Select one: O a. firm-specific; plus diversifiable b.…

A: Portfolio are created to diversify firm specific or unsystematic risk. Risk which cannot be…

Concept explainers

Portfolio Management

Portfolio management is the process by which an investor decides that how the person will invest in a variety of assets in order to get a desired return in the future. A portfolio means a pool of assets that includes securities, bonds, and other investment instruments which helps in risk minimization of the money that has been invested. In other words, it can be said that a portfolio means a combination of assets in which an investor decides to invest their money in order to get a lump sum return in the future or even a series of cash flow that the person is expecting at the end of their job life.

Question

As diversification increases, the firm-specific risk of a portfolio approaches

A. 1.

B. infinity.

C. 0.

D. (n – 1) × n.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

risk premium (RP) expected return on a portfolio,r^P realized rate of return, r¨ diversification correlation coefficient, ρρ firm-specific (diversifiable) risk market (nondiversifiable) risk relevant risk beta coefficient, ββ capital asset pricing model (CAPM) security market line (SML) market risk premium (RPM) equilibrium Define all terms
According to CAPM, the expected rate of return of a portfolio with a beta of 1.0 and an alpha of 0 is:a. Between rM and rf .b. The risk-free rate, rf .c. β(rM − rf).d. The expected return on the market, rM.
Consider a portfolio consisting of the below securities with the below characteristics: Security Amount Invested($) Beta Expected Return A 1,5 MIL 1.0 12.0%B 1.0 MIL 1.5 13.5%C 2.0 MIL 0.8 9.0% Required:a) Calculate the portfolio’s Beta. b) Calculate the portfolio’s expected return. c) Discuss the Capital Asset Pricing Model (CAPM) explaining what it is used forand which are its limitations.
As additional securities are added to a portfolio, total risk will generally ________ at a _________ rate. Group of answer choices rise; decreasing rise; increasing fall; decreasing fall; increasing
Plot the Security Market Line (SML) b) Superimpose the CAPM’s required return on the SML c) Indicate which investments will plot on, above and below the SML? d) If an investment’s expected return (mean return) does not plot on the SML, what doesit show? Identify undervalued/overvalued investments from the graph (
The security market line depicts: a. Expected return as a function of systematic risk (indicated by beta) b. The market portfolio as the optimal portfolio of risky assets c. The relationship between a security’s return and the return on the index d. Portfolio combinations of the market portfolio and the risk-free asset e. Expected return as a function of volatility
The following expected return and the standard deviation of current returns are known: Security (i) Expected Return Standard Deviation βi A 0.20 0.12 1.1 B 0.12 0.10 0.8 T-Bills 0.05 0 0 Market Portfolio 0.20 0.15 1 Required: Determine which of A or B is over-valued or undervalued.
Assume CAPM holds. Consider a portfolio that consist of a risk-free asset and two risky assets A and B such that they are in equal supply in the market. This implies that the market portfolio M = 0.5A +0.5B. Given that µM = 11%, σA = 20%,σB = 40%,ρAB = 0.75 and the risk-free rate is 2%. Compute: a) The beta factor for each security. b) The values for µA and µB and verify these quantities via the SML.
A stock's risk has a component called _____________________, which can be minimized as we add more stocks to our portfolio. Select all that apply. A) market risk B) firm-specific risk C) diversifiable risk D) systematic risk
When a portfolio consists of only a risky asset and a risk-free asset, increasing the fraction of the overall portfolio invested in the risky asset will a. Increase the expected return and standard deviation of the portfolio b. Increase the standard deviation of the portfolio c. Decrease the standard deviation of the portfolio d. Increase the expected return of the portfolio
Consider the following performance data for a portfolio manager: Benchmark Portfolio Index Portfolio Weight Weight Return Return Stocks 0.65 0.7 0.11 0.12 Bonds 0.3 0.25 0.07 0.08 Cash 0.05 0.05 0.03 0.025 a.Calculate the percentage return that can be attributed to the asset allocation decision. b.Calculate the percentage return that can be attributed to the security selection decision.
Consider the following information: Portfolio Expected Return Standard Deviation Risk-free 7% 0% Market 11.6 28 A 10.0 17 Required: a. Calculate the Sharpe ratios for the market portfolio and portfolio A. (Round your answers to 2 decimal places.) b. If the simple CAPM is valid, is the above situation possible?