ch02 - :. The University of Memphis .: 9/30/10 10:34 AM...

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9/30/10 10:34 AM :. The University of Memphis .: Page 1 of 5 https://elearn.memphis.edu/d2l/orgTools/ouHome/ouHome.asp?ou=1686913 Summary Submissions Reports Homework Chapter 2 - Preview Submission View: Delayed Exit Preview David Moore (username: dmoore8) To Submissions Attempt 1 Written: Sep 30, 2010 10:33 AM - Sep 30, 2010 10:33 AM Submission View released: Sep 23, 2010 5:05 PM Question 1 Which of the following statements is most correct? Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events. Portfolio diversification reduces the variability of returns on an individual stock. When company-specific risk has been diversified, the inherent risk that remains is market risk which is constant for all securities in the market. A stock with a beta of -1.0 has zero market risk. The SML relates required returns to firms' market risk. The slope and intercept of this line cannot be controlled by the financial manager. Question 2 You observe the following information regarding Company X and Company Y: Company X has a higher expected mean return than Company Y. Company X has a lower standard deviation than Company Y. Company X has a higher beta than Company Y. Company X has a lower coefficient of variation. Company X has more company-specific risk. Company X is a better stock to buy. Statements a and b are correct. Statements a, b, and c are correct. Question 3 Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities? (Assume the market is in equilibrium.) When held in isolation, Stock A has greater risk than Stock B. Stock B would be a more desirable addition to a portfolio than Stock A.
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ch02 - :. The University of Memphis .: 9/30/10 10:34 AM...

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