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ch2 or 3, 2 - Q1 Which of the following statements is most...

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Q1: Which of the following statements is most correct? a. 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. b. Portfolio diversification reduces the variability of returns on an individual stock. c. When company-specific risk has been diversified the inherent risk that remains is market risk, which is constant for all securities in the market. d. A stock with a beta of -1.0 has zero market risk. e. The SML relates required returns to firms’ market risk. The slope and intercept of this line cannot be controlled by the financial manager. Answer e) is correct. Q2: Stock A and Stock B both have an expected return of 10 percent and a standard deviation of 25 percent. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P is a portfolio with 50 percent invested in Stock A and 50 percent invested in Stock B. Which of the following statements is most correct?
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