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- What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.As the number of stocks in a portfolio increase, the portfolio’s systematic risk can either increase or decrease. Select one: True FalseA 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
- Describe why a fully diversified portfolio is said to have no unsystematic risk but has systematic risk? Then describe how the Arbritrage Pricing Theory (APT) has a cause and effect on the expected return of a security.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; increasingThe 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
- You can reduce un-systematic risk by adding more common stocks to your portfolio Yes NoDescribe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier. Additionally, explain how might the magnitude of the market risk premium impact people's desire to buy stocks?The security market line depicts:a. A security’s expected return as a function of its systematic risk.b. The market portfolio as the optimal portfolio of risky securities.c. The relationship between a security’s return and the return on an index.d. The complete portfolio as a combination of the market portfolio and the risk-free asset.
- The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: If a stock's expected return plots on or above the SML, then the stock's return is sufficient to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is insufficient to compensate the investor for risk.The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses. Quantitative Problem: You are given the following…Which of the following is a false statement of the market price of risk found in the Capital Market Line? a) The incremental risk divided by the incremental expected return. b) Indicates the additional expected return that the market demands for an increase in a portfolios risk. c) The equilibrium price of risk in the capital market. d) The slope of the capital market line.Which statement about portfolio diversification is correct?a. Proper diversification can reduce or eliminate systematic risk.b. Diversification reduces the portfolio’s expected return because it reduces a portfolio’s total risk.c. As more securities are added to a portfolio, total risk typically can be expected to fall at a decreasing rate.d. The risk-reducing benefits of diversification do not occur meaningfully until at least 30 individual securities are included in the portfolio.
