Ques Answers Chap 05

Ques Answers Chap 05 - QUESTIONS ANSWERS CHAP 05 5-1 a The...

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5-1 a. The probability distribution for complete certainty is a vertical line. b. The probability distribution for total uncertainty is the x-axis from -∞ to +∞. 5-2 Security A is less risky if held in a diversified portfolio because of its negative correlation with other stocks. In a single-asset portfolio, Security A would be more risky because σ A > σ B and CV A > CV B . 5-3 a. No, it is not riskless. The portfolio would be free of default risk and liquidity risk, but inflation could erode the portfolio’s purchasing power. If the actual inflation rate is greater than that expected, interest rates in general will rise to incorporate a larger inflation premium (IP) and—as we shall see in Chapter 7 —the value of the portfolio would decline. b. No, you would be subject to reinvestment rate risk. You might expect to “roll over” the Treasury bills at a constant (or even increasing) rate of interest, but if interest rates fall, your investment incomes will decrease. c.
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This note was uploaded on 04/15/2008 for the course FIN 321 taught by Professor Kelley during the Spring '08 term at Loyola Maryland.

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Ques Answers Chap 05 - QUESTIONS ANSWERS CHAP 05 5-1 a The...

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