Ch11 - FIN 302 Homework Solution Ch11 Chapter 11: Risk,...

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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 risk-free rate, not zero. c. False. The portfolio is invested one-third in Treasury bills and two-thirds 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. Let X = the fraction of the portfolio in BA stock, and;
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This note was uploaded on 06/01/2011 for the course ECONOMICS EUPHORIA taught by Professor Stevenson during the Spring '09 term at Bard College.

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Ch11 - FIN 302 Homework Solution Ch11 Chapter 11: Risk,...

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