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Which of the following statements regarding unsystematic risk is accurate? |
Multiple Choice |
It is measured by beta. |
It is compensated for by the risk premium. |
It can be effectively eliminated by portfolio diversification. |
It is measured by standard deviation. |
It is related to the overall economy. |
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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.Calculate the correlation coefficient between Blandy and the market. Use this and the previously calculated (or given) standard deviations of Blandy and the market to estimate Blandy’s beta. Does Blandy contribute more or less risk to a well-diversified portfolio than does the average stock? Use the SML to estimate Blandy’s required return.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.
- Explain correlation to your client. Calculate the estimated correlation between Blandy and Gourmange. Does this explain why the portfolio standard deviation was less than Blandys standard deviation?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 is true? Multiple Choice ___ The larger the standard deviation, the lower the total risk. ___ The larger the standard deviation, the higher the total risk. ___ The larger the standard deviation, the more portfolio risk. ___ The standard deviation is not an indication of total risk.
- 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 volatilityWhich of the following statements is CORRECT? a. Portfolio diversification reduces the variability of returns on an individual stock. b. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events. c. The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. d. A stock with a beta of −1.0 has zero market risk if held in a 1-stock portfolio. e. When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.Which of the following statements regarding non-systematic risk, systematic risk and total risk is/are true? Select one or more:a. As the number of assets within a portfolio increases, the total risk of a portfolio will go to zero.b. A riskfree asset must have zero non-systematic risk.c. A well diversified portfolio must have zero systematic riskd. Under the Capital Asset Pricing Model (CAPM).an asset with zero systematic risk must have expected return equal to the riskfree rate.
- Diversification refers to the _________.a. reduction of the stand-alone risk of an individual investment, measured by its beta coefficient, by combining it with other investments in a portfolio b. reduction of the stand-alone risk of an individual investment, measured by the standard deviation of its returns, by combining it with other investments in a portfolio c. reduction of systematic risk of an individual, measured by its beta coefficient, by combining it with other investments in a portfolio d. reduction of systematic risk of an individual, measured by the standard deviation of its returns, by combining it with other investments in a portfolio e. reduction of the unsystematic risk of an individual, measured by its coefficient of variation, by combining it with other investments in a portfolioIndicate whether its True or False. Then write the explanation! In the presence of diversification benefits, when we combine two assets together into a portfolio, the systematic risk of the portfolio will be less than the weighted average systematic risk of the individual assets in the portfolio.Which of the following measures reflects the excess return earned on a portfolio per unit of its systematic risk a. Treynor’s measure b. Sharpe’s measure c. Jensen’s measure d. Total measure