1
FIN 302
Homework Solution Ch11
Chapter 11: Risk, Return, and Capital Budgeting
1.
a.
False.
Investors require higher expected rates of return on investments with high
market
risk, not high
total
risk.
Variability of returns is a measure of total risk.
b.
False.
If beta = 0, then the asset’s expected return should equal the riskfree rate, not
zero.
c.
False.
The portfolio is invested onethird in Treasury bills and twothirds in the market.
Its beta will be:
(1/3
×
0) + (2/3
×
1.0) = 2/3
d.
True.
e.
True.
2.
a.
For an undiversified investor, the relevant measure of risk is an investment’s standard
deviation.
Therefore, for this investor, BA was the riskier investment because of its
higher standard deviation.
b.
For a diversified investor, the relevant measure of risk is an investment’s beta because
beta measures the contribution of a stock to the riskiness of a diversified portfolio.
Therefore, for this investor, BA was the riskier investment because of its higher beta.
c.
The relationship between the beta for a portfolio and the betas of the individual
securities in the portfolio is given by:
Beta of portfolio = (fraction of portfolio in first security × beta of first security)
+ (fraction of portfolio in second security × beta of second security)
We will call BA stock the first security and U.K. Treasury bills the second security;
Treasury bills have beta equal to zero.
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 Spring '09
 STEVENSON
 Net Present Value, Internal rate of return, treasury bills, Stock D

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