ProbsetCh4Qold6 - CORPORATE FINANCE 3010 Chapter 4 &5 Risk...

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^ CORPORATE FINANCE 3010 1. A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio. The two securities under consideration both have an expected return, k, equal to 15 percent. However, the distribution of possible returns associated with Asset A has a standard deviation of 12 percent; while asset B’s standard deviation is 8 percent. Both assets are correlated with the market with r equal to 0.75. Which asset should the risk- averse investor add to his/her portfolio? a. Asset A. b. Asset B. c. Both A and B. d. Cannot tell without more information. 2. Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Assume the market is in equilibrium. Which of the following statements must be true about these securities? a. When held in isolation, Stock A has greater risk than Stock B. b. Stock B would be a more desirable addition to a portfolio then Stock A. c. Stock A would be a more desirable addition to a portfolio then Stock B. d. The expected return on Stock A will be greater than that on stock B. e. The expected return on Stock B will be greater than that on stock A. 3. Bob has a $50,000 stock portfolio with a beta of 1.2, an expected return of 10.8 percent, and a standard deviation of 25 percent. Melissa has a $50,000 portfolio with a beta of 0.8, and expected return of 9.2 percent, and a standard deviation of 25 percent. The correlation coefficient, r, between Bob’s and Melissa’s portfolio is 0. Which of the following best describes their combined $100,000 portfolio? a.
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This note was uploaded on 11/22/2009 for the course HR GM600 taught by Professor Na during the Spring '09 term at Keller Graduate School of Management.

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ProbsetCh4Qold6 - CORPORATE FINANCE 3010 Chapter 4 &5 Risk...

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