Question

(True/False. Explain.) A risk averse investor will prefer a well-diversified portfolio over a single asset portfolio.

Answer #1

1. True or False: risk-free asset should provide a return of 0%.
Explain.
2. True or False: As the market portfolio is perfectly
diversified, it is risk-free. Explain.

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...

Conceptual questions on beta
A stock’s contribution to the market risk of a well-diversified
portfolio is called risk. According to the Capital
Asset Pricing Model (CAPM), this risk can be measured by a metric
called the beta coefficient, which calculates the degree to which a
stock moves with the movements in the market.
Based on your understanding of the beta coefficient, indicate
whether each statement in the following table is true or false:
Statement
True
False
A stock that is...

You
are thinking of adding one of two investments to an already
well-diversified portfolio.
Security A Security B
Expected return=12% Expected return= 12% Standard deviation of
returns 20.9%/ Standard deviation of returns = 10.1%
Beta = 0.8 Beta = 2.1
If you are a risk-averse investor, then:

Which of the following are definitely true regarding portfolio
theory based on risk and return?
a. If an investor has a well-diversified portfolio, the
portfolio would have a β of 0
d. If an investor has a well-diversified portfolio, the portfolio
would have a β of 1
c. If Stock A has a higher expected return than Stock B, a rational
investor would choose to invest in Stock A
d. A well-diversified portfolio’s level of risk cannot be further
reduced...

True, False or Uncertain, and justify. COVID-19 is a good
example of a ‘systematic risk’ since it has, to a first
approximation, materially affected the price of every asset trading
in every marketplace in the world. As a consequence, then rational,
risk-averse investors who were well-diversified prior to the
pandemic do not need to rebalance their portfolios. Please
explain/justify your answer.

Which of the following investors should be willing to pay the
highest price for an asset?
A. An investor with a single-asset portfolio.
B. An investor with a 50-asset portfolio.
C. An investor who is not completely diversified.
D. An investor who is so risk-averse that he does not recognise the
benefits of diversification.

A typical investor is assumed to be:
uninformed.
a gambler
a single security holder.
risk averse.
risk neutral.

You are a risk averse investor. You are willing to add an
investment with high volatility provided the correlation
coefficient of this investment with other stocks in the portfolio
is not less than +1.
True
False
10 points
The stock A has 25% standard deviation on its expected return
and the stock B has 25% standard deviation on its expected return.
The expected return for the portfolio of these two stocks will have
a standard deviation of 25%.
True...

Will a risk-averse person always prefer a sure thing over a
gamble? Why or why not?
Will a risk-prone person always prefer a gamble over a sure
thing? Why or why not?

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