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Unformatted text preview: You have the following data on three stocks: Stock Standard Deviation Beta A 20% 0.59 B 10% 0.61 C 12% 1.29 If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a welldiversified portfolio. Answer A; A. A; B. B; A. C; A. C; B. 2 points Question 2 Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true about these securities? (Assume market equilibrium.) Answer When held in isolation, Stock A has more risk than Stock B. Stock B must be a more desirable addition to a portfolio than A. Stock A must be a more desirable addition to a portfolio than B. The expected return on Stock A should be greater than that on B. The expected return on Stock B should be greater than that on A. 2 points Question 3 Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? Answer Variance; correlation coefficient. Standard deviation; correlation coefficient. Beta; variance. Coefficient of variation; beta . Beta; beta. 2 points Question 4 Which of the following statements is CORRECT? Answer If the returns on two stocks are perfectly positively correlated (i.e., the correlation coefficient is +1.0) and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks. A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable . If a stock has a negative beta, its expected return must be negative. A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5. According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns. 2 points Question 5 Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio? Answer Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk. Adding more such stocks will increase the portfolio's expected rate of return. Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk. Adding more such stocks will have no effect on the portfolio's risk. Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk....
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This note was uploaded on 11/07/2011 for the course ACC 220 taught by Professor  during the Spring '10 term at University of Phoenix.
 Spring '10
 

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