INVESTMENTS (LOOSELEAF) W/CONNECT
11th Edition
ISBN: 9781260465945
Author: Bodie
Publisher: MCG
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Chapter 7, Problem 5CP
Summary Introduction
To select: The correct statement for portfolio diversification.
Introduction: The combination of a variety of securities in a portfolio with the purpose of reducing the overall risk, portfolio diversification helps in risk management as it reduces the risk.
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Which statement about portfolio diversification is correct?a. Proper diversification can reduce or eliminate systematic risk.b. Diversification reduces the portfolio’s expected return because it reduces a portfolio’s total risk.c. As more securities are added to a portfolio, total risk typically can be expected to fall at a decreasing rate.d. The risk-reducing benefits of diversification do not occur meaningfully until at least 30 individual securities are included in the portfolio.
which of the following is FALSE regarding portfolio diversification and risk?
Market risk is also known as systematic risk
Through diversification, systematic risk can be eliminated.
Diversification can reduce risk without an equivalent reduction in expected return
Firm specific risk is also known as unsystematic risk
Forming a well-diversified portfolio can eliminate about half the risk associated with owning a single stock
Which 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.
Chapter 7 Solutions
INVESTMENTS (LOOSELEAF) W/CONNECT
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