Which of the following is/are TRUE? I. A stock with a beta of zero would be expected to have a rate of return equal to zero. II. With the ability to borrow and lend at the risk-free rate, there is one BEST efficient risky portfolio to hold, the tangency portfolio (identified by the tangent point of the capital market line and the efficient frontier). III. The security market line can be thought of as expressing relationships between required rates of return and beta. O1, II, and III. OIl only. O Il and III. Ol only.

Which of the following is/are TRUE? I. A stock with a beta of zero would be expected to have a rate of return equal to zero. II. With the ability to borrow and lend at the risk-free rate, there is one BEST efficient risky portfolio to hold, the tangency portfolio (identified by the tangent point of the capital market line and the efficient frontier). III. The security market line can be thought of as expressing relationships between required rates of return and beta. O1, II, and III. OIl only. O Il and III. Ol only.

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 1Q

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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.
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.
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