MANAGERIAL/ECON+BUS/STR CONNECT ACCESS
9th Edition
ISBN: 2810022149537
Author: Baye
Publisher: MCG
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Chapter 12, Problem 18PAA
To determine
To know: The self-selection mechanism to identify type of investor.
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Which statement about portfolio diversification is CORRECT?
i) Typically, as more securities are added to a portfolio, total risk would be expected to decrease at an increasing rate.ii) Proper diversification can reduce or eliminate total risk.iii) The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased.iv) Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return.
Rohan decides to invest in bonds instead of stocks because he has heard that bonds are a lower-risk investment. He uses the bond's credit rating to make his investment decisions.
Which of the following is true about the risk Rohan faces with his decision?
The bonds' value is not affected by inflation because most bonds pay a fixed coupon rate over time.
The credit ratings of the bond-issuing companies will not change from one year to the next.
The bond issuer may not pay him back because it may go bankrupt or become insolvent.
If Rohan chooses bonds from a company with low credit ratings, he's almost certain to have low default risk.
Your retirement portfolio comprises 100 shares of the Standard & Poor's 500 fund (SPY) and 100 shares of iShares Barclays Aggregate Bond Fund (AGG). The price of SPY is $115 and that of AGG is $96. If you expect the return on SPY to be 10% in the next year and the return on AGG to be 5%, what is the expected return for your retirement portfolio?
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