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Unformatted text preview: Answers to EndofChapter Questions Q71. Based on the charts below, which stock has more systematic risk , and which stock has more unsystematic risk ? Stock #1302010 10 20 30302010 10 20 30 Market return Stock return 177 Chapter 7 Risk, Return, and CAPM 178 Stock #2302010 10 20 30302010 10 20 30 Market return Stock return A71. The trend line is steeper for stock #1, so it is more sensitive to market movements and has higher systematic risk. Most of the points cluster tightly around the line for stock #1, but not so for stock #2. Most of stock #2s risk is unsystematic. Q72. The table below shows the expected return and standard deviation for two stocks. Is the pattern shown in the table possible? Stock Beta Std. Dev. #1 1.5 22% #2 0.9 35% A72. Yes, this is possible. A stock with a high beta might have a higher or lower standard deviation than a stock with a low beta. The standard deviation is made up of both systematic and unsystematic risk, whereas beta measures just systematic risk. Stock #1 has a high beta and a relatively low sigma, but this might simply reflect that most of stock #1s risk is systematic. On the other hand, stock #2 has a higher variance, but if most of this risk is unsystematic, stock #2 will have a lower beta. Q73. Which type of company do you think will have a higher beta? A fastfood chain or a cruiseship firm? A73. Cruises are luxuries, and cruise purchases are probably more sensitive to economic conditions than are hamburger sales. The cruise operator would have a higher beta in all likelihood. Q74. Is the data in the following table believable? Stock Std. Dev. #1 40% Chapter 7 Risk, Return, and CAPM 179 #2 60% 5050 Portfolio 50% A74. It is possible but not very likely that the portfolios standard deviation would equal the weighted average of the stock standard deviations. It is almost a sure bet that the portfolio standard deviation would be less than 50%. Q75. How can investors hold a portfolio with a weight of more than 100 percent in a particular asset? A75. This requires taking a short position, or borrowing another asset. The portfolio weight on the borrowed asset becomes negative, and the other weight can exceed one. Q76. According to the capital asset pricing model, is the following data possible? Asset Return Std. Dev. #1 4% 0% #2 2% 20% A76. Yes, this is possible. The first asset is the riskfree asset with a 4% return an no standard deviation. The second asset is risky in the sense that its standard deviation is positive, but it offers a return below a Tbill. However, this is possible if the assets beta is negative. Q77. Stock A has a beta of 1.5, and stock B has a beta of 1.0. Determine whether each of the statements below is true or false....
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 Spring '08
 ZUTTER

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