Question

For each statement choose TRUE OR FALSE?

1) A short sale involves purchasing shares first and then sell them to another party.
2) The average historical return of a stock is the same as its expected return going forward.
3) If a risky portfolio P and T-Bills are combined into a complete portfolio C, then C's Sharpe ratio doesn't depend on the weight allocated to P.
4) Macro risk can be diversified away by holding a large number of stocks in your portfolio.

Answer 1

1) FALSE

A short sale involves selling shares first and then expecting to buy them back at a lower price later

2) FALSE

The average historical return of a stock is not the same as its expected return going forward. The historical return is already realized and it may not be same as the expected return.

3) FALSE

The sharpe ratio depends upon the weight allocated to P as it affects the expected return and standard deviation of the portfolio.

4) FALSE

Micro risk can be diversified away by holding a large number of stocks in your portfolio. (Not macro)