Question

Which of the following is true about diversification?

a. The expected return on a risky asset depends on that asset’s unsystematic risk

b. Portfolio diversification is the investment in several but same asset classes or sectors/industry

c. Beta is a measure of systematic risk

d. There is a large portion of unsystematic risk in a well diversified portfolio

Answer #1

**Answer - Option c**

Beta measures the systematic risk within a security or portfolio. Higher the beta, higher the systematic risk.

Option a is incorrect. Expected return on a risky asset depends on asset's systematic risk. Market compensates investor only for systematic portion of total risk.

Option b is incorrect. Portfolio diversification is investment in several assets, which can be from different classes as well.

Option d is incorrect. There is no unsystematic portion in a well-diversified portfolio. Well-diversified portfolio eliminates unsystematic risk.

26 The systematic risk principle implies that the expected
return on an asset depends only on that asset’s:
unsystematic risk
systematic risk
credit risk
interest rate risk

1. Asset 1 has a beta of 1.2 and Asset 2 has a beta of 0.6.
Which of the following statements is correct?
A. Asset 1 is more volatile than Asset 2.
B. Asset 1 has a higher expected return than Asset 2.
C. In a regression with individual asset’s return as the
dependent variable and the market’s return as the independent
variable, the R-squared value is higher for Asset 1 than it is for
Asset 2.
D. All of...

You invest $1000 in a risky asset with an expected rate of
return of 0.14 and a standard deviation of 0.20 and a T-bill with a
rate of return of 0.06. The risky asset has a beta of 1.4. If you
have a risk-aversion parameter of 2.5, what is the beta of your
complete portfolio? A. 0.28 B. 0.80 C. 1.00 D. 1.12 E. 1.32

Consider a risky asset with an expected return of 12% and
standard deviation of 16%. Assume that the risk free rate is 3%,
and that you allocate 70% in the risky asset and the remaining in
risk-free T-Bill. Calculate the following: show all
formulas and calculations
Complete Portfolio’s Expected Return:
Complete Portfolio’s Standard Deviation:
Risky asset’s Sharpe ratio:
Complete Portfolio’s Sharpe ratio:

2. Which one of the followings is not related to
Geometric Return or Mean?
A. The longer the time horizon, the more critical compounding
becomes and the more appropriate the use of geometric mean.
B. The main benefit of using the geometric mean is the actual
amounts invested do not need to be known.
C. The geometric mean is the average rate of return of a set of
values calculated using the products of the terms.
D. The geometric mean...

HW #6
1. Use the following information to answer the
questions.
State
Probability
Stock A return
Stock B return
Good
Normal
Bad
0.3
0.6
0.1
8%
2%
-3%
5%
1%
-1%
(a). Given that you form a portfolio by investing $4,000 in
Stock A and $1,000 in Stock B, what is the expected return on your
portfolio?
(b).What is the variance and standard deviation of your
portfolio?
(c). Suppose that Stock A has a beta of 1.5 and Stock B...

Which of the following statements are true regarding
UNSYSTEMATIC RISK?
I. Unsystematic risk can be effectively eliminated through
portfolio diversification.
II. Unsystematic is compensated for by a risk premium.
III. Unsystematic risk is measured by beta.
IV. As rational investors hold well-diversified portfolios, the
market will not pay a risk premium for holding unsystematic
risk.
A.
I and IV only
B.
II only
C.
II and III only.
D.
I, III, and IV only.
E.
III and IV only.
You...

which of the following statements is true about diversification
and risk?
With higher number of assets, the company specific risk
approaches zero and total
portfolio risk falls to the systematic risk (market risk)
With higher number of assets, the company specific risk
approaches the systematic risk
(market risk)
With higher number of assets, the total portfolio risk increases
to the sum of the
individual company specific risk and the systematic risk (market
risk)
With higher number of assets, total portfolio...

You invested $1000 in a risky asset with an expected rate of
return of 017 and standard devation of 040 and a T- bill with a
rate of return of 0.04
What is the weight you should put into risky asset to have
optimal portfolio if yoyr coeficient of risk aversion A= 4?
Thank you,

ou invest $1,000 in a risky asset with an expected rate of
return of 0.17 and a standard deviation of 0.40 and a T-bill with a
rate of return of 0.04.
What percentages of your money must be invested in the risky asset
and the risk-free asset, respectively, to form a portfolio with an
expected return of 0.11?
Select one:
a. 53.8% and 46.2%
b. 75% and 25%
c. 62.5% and 37.5%
d. 46.2% and 53.8%
e. Cannot be determined.

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