Question

Which of the following statements are true regarding UNSYSTEMATIC RISK? I. Unsystematic risk can be effectively...

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 recently purchased a stock that is expected to earn 19% in a booming economy, 8% in a normal economy and lose 3% in a recessionary economy. There is a 25% probability of a boom, a 60% chance of a normal economy, and a 15% chance of a recession. What is your expected rate of return on this stock?

.

A.

9.10%

B.

6.80%

C.

12.67%  

D.

12.88%

E.

8.30%

Homework Answers

Answer #1

Solution:

1) Which of the following statements are true regarding UNSYSTEMATIC RISK:

I. Unsystematic risk can be effectively eliminated by portfolio diversification.

IV. As rational investors hold well-diversified portfolios, the market will not pay a risk premium for holding unsystematic risk.

So the Right Option is A) I and IV only.

2) Calculation of the Expected Rate of Return on this Stock:

Therefore, the Expected Rate of Return on this Stock is 9.10%.

Right Option is A) 9.10%.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
QUESTION 29 Which of the following are TRUE statements regarding civil penalties that may be imposed...
QUESTION 29 Which of the following are TRUE statements regarding civil penalties that may be imposed for insider trading violations? I. Civil penalties may be imposed only on registered persons. II. The civil penalty may be up to three times the profit gained or the loss avoided on an illegal transaction. III. A broker/dealer may be held liable if one of its registered reps was not properly supervised while committing an insider trading violation. IV. The violation is defined as...
Which of the following is/are TRUE? I. The security market line can be thought of as...
Which of the following is/are TRUE? I. The security market line can be thought of as expressing relationships between expected required rates of return and beta. II. A stock with a beta of zero would be expected to have a rate of return equal to the risk-free rate. III. Assume that the capital asset pricing model holds. Then, a security whose expected return falls below the SML (security market line) indicates that the security is undervalued, whereas a security whose...
21.Which of the following statements about stress testing are true? I. Stress testing can complement VaR...
21.Which of the following statements about stress testing are true? I. Stress testing can complement VaR estimation in helping risk managers identify how vulnerable a portfolio might be to a variety of extreme events. II. Stress tests cannot be used in VaR estimates. III. Random combinations of stress shocks could be inconsistent with the basic laws of economics. IV. The inclusion of a large number of scenarios helps management better understand the risk exposure of a portfolio. I and III...
Which of the following are true regarding B cell development? i. B cell precursors rearrange VDJ...
Which of the following are true regarding B cell development? i. B cell precursors rearrange VDJ genes in the bone marrow ii. Immature B cells only have one chance to rearrange VDJ genes to pass negative selection iii. Immature B cells interact with follicular dendritic cells in the bone marrow to induce maturation iv. Mature B cells circulate between lymph, blood, and secondary lymphoid tissues to find their specified antigen i, iv i, ii, iii, iv i, iii i, ii,...
Q1-7. Which of the following statements are TRUE about coupon bonds? I. If there are two...
Q1-7. Which of the following statements are TRUE about coupon bonds? I. If there are two par bonds with the same coupon, market price and principal but with different maturity, the one with longer maturity should have higher duration. II. A junk bond (or deep discount bond) must pay high coupon in general as it contains high level of risk. III. If an investor tries to avoid reinvestment rate risk as much as possible, he/she should go for low coupon...
Which of the following statements is(are) true? I. A sensitivity analysis is one method managers can...
Which of the following statements is(are) true? I. A sensitivity analysis is one method managers can use to examine the stand-alone risk of a project. II. When performing a scenario analysis, it is never necessary to estimate the cash flows of the base case economic scenario.   III. Monte Carlo analysis can be viewed as a more sophisticated version of scenario analysis. I only II only III only I and II only I and III only
Which of the following about the risk of arbitrage is correct? I: In theory, arbitrage is...
Which of the following about the risk of arbitrage is correct? I: In theory, arbitrage is riskless because it is a long-short hedged position. II: in theory, it is riskless because eventually price has to go back to fundamentals. There is no uncertainty on this outcome. III: In reality, even if eventually price will go to fundamentals, arbitrageurs maybe forced out of the market because of the risk of margin call. IV: In reality, if lenders do not dare to...
Which of the following statements regarding inventory is (are) true? I. For a merchandising company, the...
Which of the following statements regarding inventory is (are) true? I. For a merchandising company, the cost of goods available for sale minus the cost of goods sold will equal ending inventory. II. The LIFO inventory cost flow assumption is preferable to FIFO for a company wishing to maximize profits during a period of declining costs. III. A company that ships finished goods FOB destination will keep the inventory in its accounting records up until the point that the goods...
1) Which of the following statements is true regarding bank charters? I. National banks are chartered...
1) Which of the following statements is true regarding bank charters? I. National banks are chartered by the U.S. comptroller of the currency. II. Banks may be chartered at either the national or state level. III. Only nationally-chartered banks can be members of the Federal Reserve System Select one: A. I and II only B. I and III only C. II and III only D. I, II, and III 2) Which of the following is true concerning commercial paper? I....
Which of the following are correct? I. If expected inflation increases, investors will consider selling bonds...
Which of the following are correct? I. If expected inflation increases, investors will consider selling bonds as the real value of this investment will decrease and bond yields should increase. II. Reinvestment risk occurs when interest rates decrease so that coupons from a bond are reinvested at a lower rate than originally expected. III. If interest rates are expected to increase, an investor should consider selling long-maturity bonds and buying short-maturity bonds to decrease portfolio duration. IV. If the risk...