Question

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 risk can be eliminated.

e) Beta measures nondiversifiable risk.

f) Beta is the slope of the Security Market Line. g) As investors become more risk averse, the market risk premium increases and the security market line becomes steeper.

Answer 1

1: False: The investors do not require increase in risk for increase in return but vice versa is true.

2: True: The coefficient of variation captures the effect of both risk and return in a portfolio.

3: True: A negatively correlated asset will reduce the risk of portfolio.

4: False: Non diversifiable risk cannot be eliminated since it is market risk.

5: True: Beta measures the sensitivity of the asset's returns to market returns.

6: False: Slope of SML is the market risk premium.

7: True: As the investors become more risk averse they require greater return to compensate for risk and this increases the required rate of return.