PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 7, Problem 13PS
Risk and diversification In which of the following situations would you get the largest reduction in risk by spreading your investment across two stocks?
- a. The two shares are perfectly correlated.
- b. There is no correlation.
- c. There is modest negative correlation.
- d. There is perfect negative correlation
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Students have asked these similar questions
Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market? Explain why the correlations of these firms are expected to be low.
Identify the FALSE statement
a. Where two securities are perfectly positively correlated, there is no reduction in unsystematic risk through diversification.
b. Portfolio theory, as initially developed by Markowitz (1952), assumes that the returns from investments are normally distributed.
c. Beta is calculated by finding the covariance between the return on the asset and the return on the market and dividing it by the variance of the return on the market.
d. A well-diversified portfolio should have a beta significantly less than one.
Which of the following statements is false?
A.
The lower the correlation coefficient, the greater the potential benefits from diversification.
B.
To make the covariance of two random variables easier to interpret, it may be divided by the product of the random variables’ standard deviation. The resulting value is called the correlation coefficient, or simply, correlation.
C.
The risk that remains cannot be diversified away and is called the systematic risk.
D.
In the event of bankruptcy, preferred stock ranks below common stock but above debt.
Chapter 7 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 7 - Rate of return The level of the Syldavia market...Ch. 7 - Real versus nominal returns The Costaguana stock...Ch. 7 - Arithmetic average and compound returns Integrated...Ch. 7 - Risk premiums Here are inflation rates and U.S....Ch. 7 - Risk Premium Suppose that in year 2030, investors...Ch. 7 - Stocks vs. bonds Each of the following statements...Ch. 7 - Expected return and standard deviation A game of...Ch. 7 - Standard deviation of returns The following table...Ch. 7 - Average returns and standard deviation During the...Ch. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Diversification Here are the percentage returns on...Ch. 7 - Risk and diversification In which of the following...Ch. 7 - Prob. 14PSCh. 7 - Portfolio risk To calculate the variance of a...Ch. 7 - Portfolio risk a) How many variance terms and how...Ch. 7 - Portfolio risk Table 7.8 shows standard deviations...Ch. 7 - Portfolio risk Hyacinth Macaw invests 60% of her...Ch. 7 - Stock betas What is the beta of each of the stocks...Ch. 7 - Stock betas There are few, if any, real companies...Ch. 7 - Portfolio betas A portfolio contains equal...Ch. 7 - Portfolio betas Suppose the standard deviation of...Ch. 7 - Portfolio risk Here are some historical data on...Ch. 7 - Portfolio risk Suppose that Treasury bills offer a...
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