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for BusinessTutor: Questions 8-12 Question 8 1. Which of

Resolved Question:

for BusinessTutor: Questions 8-12
Question 8
1. Which of the following statements is
CORRECT?
Answer

A large portfolio of randomly selected stocks will always have a standard deviation of returns that is less than the standard deviation of a portfolio with fewer stocks, regardless of how the stocks in the smaller portfolio are selected.

Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.

A large portfolio of randomly selected stocks will
have a standard deviation of returns that is greater than the standard deviation of a 1-stock portfolio if that one stock has a beta less than 1.0.

A large portfolio of stocks whose betas are greater
than 1.0 will have less market risk than a single stock with a beta = 0.8.

If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.
2 points
Question 9
1. Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.)
Answer

When held in isolation, Stock A has more risk than Stock B.

Stock B must be a more desirable addition to a portfolio than A.

Stock A must be a more desirable addition to a portfolio than B.

The expected return on Stock A should be greater than that on B.

The expected return on Stock B should be greater than that on A.
2 points
Question 10
1. Which of the following statements is CORRECT?
Answer

A stock's beta is less relevant as a measure of risk to an investor with a well-diversified portfolio than to an investor who holds only that one stock.

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.

The required return on a firm's common
stock is, in theory, determined solely by its market risk. If the market risk is known, and if that risk is expected to remain constant, then no other information is required to specify the firm's required return.

Portfolio diversification reduces the variability of returns (as measured by the standard deviation) of each individual stock held in a portfolio.

A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.
2 points
Question 11
1. During the coming year, the market risk premium (rM − rRF), is expected to fall, while the risk-free rate, rRF, is expected to remain the same. Given this forecast, which of the following statements is CORRECT?
Answer

The required return will increase for stocks
with a beta less than 1.0 and will decrease for stocks with a beta greater than 1.0.

The required return on all stocks will remain
unchanged.

The required return will fall for all stocks, but it will fall more for stocks with higher betas.

The required return for all stocks will fall
by the same amount.

The required return will fall for all stocks, but it
will fall less for stocks with higher betas.
2 points
Question 12
1. Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has equal amounts invested in each of the three stocks. Each of the stocks has a standard deviation of 25%. The returns on the three stocks are independent of one another (i.e., the correlation coefficients all equal zero). Assume that there is an increase in the market risk premium, but the risk-free rate remains unchanged. Which of the following statements is CORRECT?
Answer

The required return of all stocks will remain
unchanged since there was no change in their betas.

The required return on Stock A will increase
by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.

The required return on the average stock will
remain unchanged, but the returns of riskier stocks (such as Stock C) will increase while the returns of safer stocks (such as Stock A) will decrease.

The required returns on all three stocks will increase by the amount of the increase in the market risk premium.

The required return on the average stock will remain unchanged, but the returns on riskier stocks (such as Stock C) will decrease
while the returns on safer stocks (such as Stock A) will increase.
Submitted: 4 years ago.
Category: Finance
Expert:  Manal Elkhoshkhany replied 4 years ago.

8)

 

 

Diversifiable risk can be reduced by forming a large portfolio, but normally even highly-diversified portfolios are subject to market (or systematic) risk.

 

9)

 

The expected return on Stock A should be greater than that on B

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Expert:  Manal Elkhoshkhany replied 4 years ago.

10)

 

A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock

 

11)

 

The required return will fall for all stocks, but it will fall more for stocks with higher betas.

 

12)

 

The required return on Stock A will increase by less than the increase in the market risk premium, while the required return on Stock C will increase by more than the increase in the market risk premium.

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