Question

True or False:

- The best measure to use when comparing alternative investments is the amount of the dollar gain or loss.
- With holding periods of more than a year, annualizing the HPR
makes it smaller.
- The lower the correlation coefficient between two stocks, the
greater will be the benefit from diversifying by combining the two
stocks in a portfolio.
- Based on the period 1950 – 1999, you would have the less
uncertainty about any expected return on small company stocks than
you would about the expected return on large company
stocks.
- Our author discusses the average return and standard deviation
for 4 different assets for the period 1950 – 1999.
- "Diversifiable” risk, “Company-specific” risk, “Unsystematic”
risk and “Market” risk all refer to the same type of
risk.
- By diversifying you can eliminate most or all of unsystematic risk.

- the standard deviation is the square root of the variance.

- A stock with one-half the average market risk would have a value for beta of 2.0.

- The only variable on the right-hand side of the CAPM formula that varies from one company to another is expected return on the market.

- In order to properly evaluate a stock, investors need only consider its risk.,

- Investors should always choose stocks with the highest reward-risk ratio.

- Ceteris paribus, ower standard deviations represent greater risk.

Answer #1

The volatility of an asset’s return can be broken into
diversifiable (i.e., unsystematic or firm-specific) and
non-diversifiable (i.e., systematic) components. Investors who hold
the asset should be compensated only for the
non-diversifiable risk, which is measured by the “beta” of the
asset. A stock that has a zero beta has no systematic risk and its
expected rate of return should equal the risk-free rate. Suppose
that you have two different stocks:
S&P 500, which has a beta of 1.00 and...

True false:
1. Under the CAPM, investors require a rate of return that is
proportional to the volatility of each asset.
2. The simple average of all equity betas in a market must equal
exactly 1, by construction.
3. All assets and portfolios that plot on the Capital Market
Line have returns that are perfectly positively correlated with the
market portfolio.
4. A firm that operates in rural areas, and is more exposed to
bush fire risk, will have a...

1. Which one of the followings is not related to Holding
Period Return (HPR)?
A. Holding period return (or yield) is the total return earned
on an investment during the time that it has been held.
B. A holding period is the amount of time the investment is held
by an investor, or the period between the purchase and sale of a
security.
C. Holding period return is the average rate of return of a set
of values calculated using...

True or False Questions:
Free cash flow calculation is possible using only the data in
the Cash Flow Statement.
If you are interested in a company’s ability to meet its
short-term obligations, you should calculate its equity
multiplier.
Beta is an appropriate measure of risk when the investor holds
an efficiently diversified (or well-diversified) portfolio.
Assume that Stock A has a standard deviation of 0.20 and Stock B
has a standard deviation of 0.15. It is possible for Stock B...

Problem1
Are statements below true or false? Explain
your answer.
a) (0.5 point) Assume that CAPM holds. Given that stocks A and
B, which are traded in the same market, have the same expected
return, their betas must be the same.
b) (0.5 point) Stocks A and B, which are traded in the same
market, have the same beta. Given that
Correlation(A,Market)>Correlation(B,Market), it must be the case
that Standard deviation(A)<Standard deviation(B).
c) (0.5 point) Assume that CAPM holds. In January...

For each of the following statements clearly
indicate whether the statement is true or false. Provide a
brief explanation to justify your answer. Your answer
must begin with "True" or
"False" followed by your explanation. Note
that your explanation cannot just be a restatement of the question
statement.
a) A security with a beta of 0.8 can have a standard deviation
of return that is greater than the market portfolio’s standard
deviation of return. (Begin your answer with
"True" or...

Case Problem 4.2 The Risk-Return Tradeoff: Molly O’Rourke’s
Stock Purchase Decision Over the past 10 years, Molly O’Rourke has
slowly built a diversified portfolio of common stock. Currently her
portfolio includes 20 different common stock issues and has a total
market value of $82,500. Molly is at present considering the
addition of 50 shares of either of two common stock issues—X or Y.
To assess the return and risk of each of these issues, she has
gathered dividend income and...

"Risk' can be best defined as on the of the
followings:
a. Variability of returns and probability of financial loss
b. Chance of financial loss
c. Variability of returns
d. Correlation of relationship among two variables
Which of the following statement is NOT TRUE when we argue that
the idea of riskless arbitrage is to accumulate the portfolio with
following conditions :
a. Requires no net wealth invested initially
b. Invest in the long-term securities only where risk will be...

4. Statistical measures of standalone 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 Blue Llama
Mining Company (BLM)...

1. Beale Manufacturing Company has a beta of 1.2, and Foley
Industries has a beta of 0.9. The required return on an index fund
that holds the entire stock market is 10.5%. The risk-free rate of
interest is 7%. By how much does Beale's required return exceed
Foley's required return?
2. Suppose you held a diversified portfolio consisting of a
$7,500 investment in each of 20 different common stocks. The
portfolio's beta is 1.83. Now suppose you decided to sell...

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