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 welldiversified 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% 
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 welldiversified 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%.
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