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1) Which of the following statements is false?

1) Which of the following statements is false?

a) Because diversification improves with the number of stocks held in a portfolio, an efficient portfolio should be a large portfolio containing many different stocks.

b) The beta of a security is the sensitivity of the security's return to the return of the overall market.

c) An efficient portfolio cannot be diversified further; that is, there is no way to reduce the risk of the portfolio without lowering its expected return.

d) We call a portfolio that contains only unsystematic risk an efficient portfolio.

e) None of the above


2) If the market portfolio has an expected return of 0.12 and a standard deviation of 0.40, and the risk-free rate is 0.04, what is the slope of the security market line?

a) 0.08

b) 0.20

c) 0.04

d) 0.12

e) None of the above


3) A particular asset has a beta of 1 and an expected return of 10%. The expected return on the market portfolio is 13% and the risk-free is 5%. Which of the following statement is correct?

a) This asset lies on the security market line.

b) This asset lies above the security market line.

c) This asset lies below the security market line.

d) Cannot tell from the given information.

e) None of the above


4) Which of the following statements is false?

a) Firm-specific news is good or bad news about the company itself.

b) Firms are affected by both systematic and firm-specific risk.

c) When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio.

d) The risk premium for a stock is affected by its idiosyncratic risk.

e) None of the above

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