96)Stock returns can be explained by the stock's ________ and the stock's ________.A)unique risk; firm-specific riskB)aggressive risk; defensive riskC)Beta; market riskD)Beta; unique riskAnswer: D97)Why do stock market investors appear not to be concerned with unique risks when calculatingexpected rates of return?98)Why would a stock market investor not be concerned with unique risks when calculating expectedrates of return?99)Macro events only are reflected in the performance of the market portfolio because:100)The average of Beta values for all individual stocks is:A)less than 1.0; most stocks are defensive.B)exactly 1.0; these stocks represent the market.C)unknown; Betas are continually changing.D)greater than 1.0; most stocks are aggressive.Answer: B14
SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.101)Of what strategic use are the terms "defensive" and "aggressive" when applied to individual stocksor portfolios?Answer:Defensive stocks are not as sensitive to changes in market fluctuations when compared to themarket portfolio. Accordingly, these stocks would have a Beta less than 1.0. Thus, it would beexpected that these securities would return less than the market portfolio during periods whenthe market portfolio is offering positive returns. This might appeal to investors who are toorisk-averse to invest in the market portfolio. In times of a down market, defensive stockswould be expected to decrease less than the market, thus providing a degree of expectedprotection. Aggressive stocks are more sensitive than the market to market fluctuations. Thus,they amplify market changes. This is good when the market is going up but can be quitedetrimental when the market is going down. Portfolios may contain both aggressive anddefensive stocks, which will mute the effect of each. This is true since the portfolio Beta is amarket value-weighted average of the individual Betas in the portfolio. Investors may alsochoose to change the Beta of the portfolio according to expected movements in the overallmarket. Thus, portfolios would become more defensive when the market is expected todecline. The problem with this strategy is, of course, the accuracy of the predicted marketmovement.
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