Question

8. (5) True or false or Uncertain. Explain briefly.

- By the CAPM, stocks with the same beta have the same variance
- If CAPM holds, α should be zero for all assets.
- Optimal portfolios should exclude individual assets whose expected return and risk (measured by its standard deviation) are dominated by other available assets.
- A stock with high standard deviation may contribute less to portfolio risk than a stock with lower standard deviation.
- Diversification reduces the expected return on the portfolio as its risk decreases.

Answer #1

a: False: CAPM beta represents the systematic risk of stock and variance represent unsystematic risk or diversifiable risk. Hence both cant be compared

b: True; CAPM which is based on efficient market hypothesis states that expected alpha is zero for all securities

c: uncertain: Optimal portfolios are created by considering overall risk and correlation between each stocks and we cant say a stock has to be avoided because it has inferior risk or return

d: False; standard deviation represents risk and stock with high std dev contributes heavily to portfolio risk

e: False: A diversification can provide same portfolio return with lower risks.

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...

5. Diversification reduces the overall risk of a portfolio
because of a factor called correlation. Explain how a stock with a
return standard deviation of 20% can be combined with a stock with
a return standard deviation of 13.2% and result in a portfolio
whose return standard deviation is much lower than the standard
deviations of the two individual stocks? What is it about the
correlation coefficient between stocks which reduces portfolio
risk?

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...

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...

The return on stocks in a particular year was 18%. The return on
bonds was 8%, and the return on Treasury bills (risk-free rate) was
6%.
The standard deviation of stock returns during the year was 22%,
the standard deviation of bond returns during the year was 7%, and
the standard deviation of Treasury bill returns was zero.
A 50-50 portfolio combination of stocks and bonds had a return
of 13% and a standard deviation of 14%.
Which of the...

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

3. We have 10 stocks with the same standard deviation of 20%.
Assume CAPM market beta captures all undiversifiable risk.
a. If all 10 stocks all have zero
market beta, what is the standard deviation of an equally-weighted
portfolio of these 10 stocks?
b. If all 10 stocks all have a market
beta of 1, what is the standard deviation of an equally-weighted
portfolio of these 10 stocks?

CAPM, portfolio risk, and return
Consider the following information for three stocks, Stocks A,
B, and C. The returns on the three stocks are positively
correlated, but they are not perfectly correlated. (That is, each
of the correlation coefficients is between 0 and 1.)
Stock
Expected Return
Standard Deviation
Beta
A
8.32
%
16
%
0.8
B
10.40
16
1.3
C
12.06
16
1.7
Fund P has one-third of its funds invested in each of the three
stocks. The risk-free...

Assume that CAPM holds. Which of the following statements is
TRUE?
a)Beta indicates a stock’s diversifiable risk
b)Two stocks with the same stand-alone risk must have the same
betas
c)The slope of the security market line is given by the market
risk premium
d)If the beta of a Stock doubles, then its required rate of
return must also double
e)If the risk-free rate decreases, then the market risk premium
must also decrease

2. An investor can design a risky portfolio based on two stocks,
S and B. Stock S has an expected return of 12% and a standard
deviation of return of 25%. Stock B has an expected return of 10%
and a standard deviation of return of 20%. The correlation
coefficient between the returns of S and B is 0.4. The risk-free
rate of return is 5%
a. The proportion of the optimal risky portfolio that should be
invested in stock...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 9 minutes ago

asked 23 minutes ago

asked 27 minutes ago

asked 27 minutes ago

asked 44 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago