Question

1. Select the correct answer. a. Stand-alone risk is the risk an investor would face if he or she held portfolio of assets. b. Risk-averse investors like risk and require lower rate of return as an inducement to buy riskier securities. c. Risk premium is the difference between the expected rate of return on a given risky asset and that on a less risky asset. d. Capital Asset Pricing Model is based on the proposition that any stock’s required rate of return is equal to the risk-free rate of return minus a risk premium.

Answer #1

Stand alone risk is risk an investor would face if held only single asset. Option a is incorrect

Risk premium is difference between market risk and risk free asset. So optiin c is also incorrect

CAPM is based on proposition that any stocks required rate of return is equal to risk free asset + beta*risk premium. So, option D is incorrect

So option B is correct risk averse investors like risk and require low rate of return as an inducement to buy riskier securities

Risk and Rates of Return: Introduction
Risk is an important concept affecting security prices and rates
of return. Risk is the chance that some unfavorable event will
occur, and there is a trade-off between risk and return. The higher
an investment’s risk, the (Select One: lower, higher,
equivalent) _________ the return required to induce
investors to purchase the asset. This relationship between risk and
return indicates that investors are risk (Select One:
ambivalent, averse) ____________ ; investors dislike
risk and...

1. 1: Risk and Rates of Return: Introduction
Risk and Rates of Return: Introduction
Risk is an important concept affecting security prices and rates
of return. Risk is the chance that some unfavorable event will
occur, and there is a trade-off between risk and return. The higher
an investment’s risk, the -Select-lowerhigherequivalentItem 1 the
return required to induce investors to purchase the asset. This
relationship between risk and return indicates that investors are
risk -Select-ambivalentaverseItem 2 ; investors dislike risk and...

When considering stand-alone risk, the return distribution of a
less risky investment is more peaked (“tighter”) than that of a
riskier investment. What shape would the return distribution have
for an investment with (a) completely certain returns and (b)
completely uncertain returns? What are the two types of portfolio
risk? How is each type defined? How is each type measured?

10. Select all which is true
a) Most investors are risk averse, since for a given increase in
return they require an increase in risk.
b) The coefficient of variation is important for evaluating the
risk of a security held in a portfolio.
c) Adding an asset to a portfolio that is perfectly positively
correlated with existing portfolio returns will have no effect on
portfolio risk.
d) Diversifiable risk is the only risk that influences the
required return because nondiversifiable...

1.Which of the follwing statements about portfolio risk are true.
a) the riskiness of a portfolio is the weighted average of the
imdividual assets' standard deviations
b) two stocks can be individually quite risky but when they
are combined to form a portfolio it is possible that they are not
risky at all
c) diversification only wants to reduce risk if you portfolios
and fix it perfectly positively related stocks (securities)
d) all of the above
2. which of the...

Conceptual questions on portfolio and stand-alone
risk
Latasha holds a $7,500 portfolio that consists of four stocks.
Her investment in each stock, as well as each stock’s beta, is
listed in the following table:
Stock
Investment
Beta
Standard Deviation
Perpetualcold Refrigeration Co. (PRC)
$2,625
0.90
9.00%
Kulatsu Motors Co. (KMC)
$1,500
1.70
11.00%
Three Waters Co. (TWC)
$1,125
1.10
18.00%
Mainway Toys Co. (MTC)
$2,250
0.30
25.50%
Suppose all stocks in Latasha’s portfolio were equally weighted.
The stock that would...

1A) Risk-averse investors who hold a single stock would require
a higher rate of return on a stock whose standard deviation is 0.33
than on a stock whose standard deviation is 0.18. But, if these
stocks are held as part of a portfolio, it is possible for the
stock with the higher standard deviation to have the lower required
return. True/False?
1B) Ceteris paribus, a change in the beta of a firm's stock will
change the required rate of return...

2. Statistical measures of stand-alone risk
Remember, the expected value of a probability distribution is a
statistical measure of the average (mean) value expected to occur
during all possible circumstances. To compute an asset’s expected
return under a range of possible circumstances (or states of
nature), multiply the anticipated return expected to result during
each state of nature by its probability of occurrence.
Consider the following case:
James owns a two-stock portfolio that invests in Happy Dog Soap
Company (HDS)...

Statistical measures of stand-alone risk
Remember, the expected value of a probability distribution is a
statistical measure of the average (mean) value expected to occur
during all possible circumstances. To compute an asset’s expected
return under a range of possible circumstances (or states of
nature), multiply the anticipated return expected to result during
each state of nature by its probability of occurrence.
Consider the following case:
James owns a two-stock portfolio that invests in Celestial Crane
Cosmetics Company (CCC) and...

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2. Statistical measures of stand-alone risk
Remember, the expected value of a probability distribution is a
statistical measure of the average (mean) value expected to occur
during all possible circumstances. To compute an asset’s expected
return under a range of possible circumstances (or states of
nature), multiply the anticipated return expected to result during
each state of nature by its probability of occurrence.
Consider the following case:
Tyler owns a two-stock portfolio...

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