Which of the following statements is CORRECT? A stock's standard deviations is more relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock. O An investor can't eliminate all market risk even if he or she holds a very large and even well diversified portfolio of stocks. According to the CAPM, stocks with higher standard deviations will have higher expected returns. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks it would be essentially riskless.

Which of the following statements is CORRECT? A stock's standard deviations is more relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock. O An investor can't eliminate all market risk even if he or she holds a very large and even well diversified portfolio of stocks. According to the CAPM, stocks with higher standard deviations will have higher expected returns. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the diversifiable risk inherent in owning stocks. Therefore, if a portfolio contained all publicly traded stocks it would be essentially riskless.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter25: Portfolio Theory And Asset Pricing Models

Section: Chapter Questions

Problem 9MC

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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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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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Which of the following statements is CORRECT? a. The higher the correlation between the stocks in a portfolio, the lower the risk inherent in the portfolio. b. An investor can eliminate almost all risk if he or she holds a very large and well diversified portfolio of stocks. c. Once a portfolio has about 40 stocks, adding additional stocks will not reduce its risk by even a small amount. d. An investor can eliminate almost all diversifiable risk if he or she holds a very large, well-diversified portfolio of stocks. e. An investor can eliminate almost all market risk if he or she holds a very large and well diversified portfolio of stocks.
Which is true with regards to the systematic and unsystematic risk? To mitigate the unsystematic risk, an investor must choose two stocks that has a perfectly negative correlation when establishing ones portfolio of securities A portfolio with stocks that has high Sharpe ratios does not have both unsystematic and systematic risk because then generate excess returns The likes of inflation, recession, changes in interest rates are examples of market risk that can be reduced to zero by a portfolio that is fully diversified Systematic risk can be diversified by choosing stocks that has a small standard deviation but high correlation coefficient since these stocks are less riskier