FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 6: Risk and return

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 81

Multiple Choice

Review LaterAdd Note

Review Later

Assume that your cousin holds just one stock, Eastman Chemical Bonding (ECB) , which he thinks has very little risk.You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified.You obtain the following returns data for Wilder's Creations and Buildings (WCB) .Both companies have had less variability than most other stocks over the past 5 years.Measured by the standard deviation of returns, by how much would your cousin's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.)

A) 3.29%
B) 3.46%
C) 3.65%
D) 3.84%
E) 4.03%

F) B) and D)
G) A) and E)

Correct Answer

verified

Show Answer

Question 82

True/False

Review LaterAdd Note

Review Later

Assume that two investors each hold a portfolio, and that portfolio is their only asset.Investor A's portfolio has a beta of minus 2.0, while Investor B's portfolio has a beta of plus 2.0.Assuming that the unsystematic risks of the stocks in the two portfolios are the same, then the two investors face the same amount of risk.However, the holders of either portfolio could lower their risks, and by exactly the same amount, by adding some "normal" stocks with beta = 1.0.

A) True
B) False

Correct Answer

verified

Show Answer

Question 83

True/False

Review LaterAdd Note

Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10.However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the low standard deviation.

If the returns of two firms are negatively correlated, then one of them must have a negative beta.

Any change in its beta is likely to affect the required rate of return on a stock, which implies that a change in beta will likely have an impact on the stock's price, other things held constant.