If an investor diversifies his portfolio, appropriate measure of risk for any one security in the...

If an investor diversifies his portfolio, appropriate measure of risk for any one security in the portfolio is this. A. standard deviation B. Beta C. Sharpe ratio D. coefficient of variation

Solutions

Expert Solution

The correct answer is B. Beta

Diversification can reduce the Unsystematic risk component.
Unsystematic Risk - It is the volatility of a stock on account of internal company specific factors. This risk can be avoided through diversification. The greater the number of stocks in the portfolio the greater is the chance of Unsystematic Risk getting cancelled out.

Systematic Risk is the volatility of a stock on account of economy wide factors. It affects all stocks in the same direction with unequal sensitivity. It is the risk which is inherent to the market and it cannot be avoided through diversification. This risk is also known as undiversifiable risk. Increasing number of stocks will not affect the systematic or undiversifiable risk

Beta coefficient measures the Systematic Risk.

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

For an investor with risk aversion index A=4, which portfolio is preferable? A. Portfolio B with...

For an investor with risk aversion index A=4, which portfolio is preferable? A. Portfolio B with an expected return of 10% and standard deviation of 17% B. Risk-free asset with an expected return of 4% C. Portfolio C with an expected return of 12% and standard deviation of 20% D. Portfolio A with an expected return of 8% and a standard deviation of 13%

An investor with a risk aversion coefficient of A=2.5 is considering forming a portfolio with a...

An investor with a risk aversion coefficient of A=2.5 is considering forming a portfolio with a risk-free and a risky asset. The risk-free rate is 4%, the risky asset has an expected return of 12% with a standard deviation of 20%. (a) Calculate a utility table with weights in 10% increments (0%, 10%, 20%, … 100%) between risk-free and risky asset. (b) Find the set of weights that maximizes the utility for such investor.

Given the following information, please estimate the expected return and risk for the portfolio Security Security...

Given the following information, please estimate the expected return and risk for the portfolio Security Security 1 Security 2 Security 3 E(R) 0.015 0.02 0.05 Weight 33% 33% 34% Security 1 Security 2 Security 3 Security 1 Var=0.05 Corr=0.5 Corr=0.3 Security 2 Var=0.06 Corr=0.6 Security 3 Var=0.07

An investor has two bonds in his portfolio that have a facevalue of $1,000 and...

An investor has two bonds in his portfolio that have a face value of $1,000 and pay an 11% annual coupon. Bond L matures in 15 years, while Bond S matures in 1 year.A. What will the value of the Bond L be if the going interest rate is 7%, 8%, and 12%? Assume that only one more interest payment is to be made on Bond S at its maturity and that 15 more payments are to be made on...

An investor wishes to measure the investment risk presented by an asset which has the following...

An investor wishes to measure the investment risk presented by an asset which has the following distribution: State Return Probability 1 10% 0.5 2 20% 0.3 3 50% 0.2 (i) Evaluate any three different measures of investment risk for this asset. Where necessary, you may assume a benchmark return of 25%. (ii) State two key properties of Value at Risk (VaR).

Passive Stock Market Investor (PSMI) holds one stock market index ETF in his/her portfolio, but has...

Passive Stock Market Investor (PSMI) holds one stock market index ETF in his/her portfolio, but has learned that investing in a bond market index ETF as well may reduce his/her portfolio risk due to diversification. The annual returns for both ETFs for the last ten years are listed below. Measured by the standard deviation of returns, by how much would PSMI’s portfolio’s historical risk been reduced if PSMI invested 70% in the stock market index ETF and 30% in the...

Passive Stock Market Investor (PSMI) holds one stock market index ETF in his/her portfolio, but has...

Passive Stock Market Investor (PSMI) holds one stock market index ETF in his/her portfolio, but has learned that investing in a bond market index ETF as well may reduce his/her portfolio risk due to diversification. The annual returns for both ETFs for the last ten years are listed below. Measured by the standard deviation of returns, by how much would PSMI’s portfolio’s historical risk been reduced if PSMI invested 60% in the stock market index ETF and 40% in the...

A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free...

A moderately risk-averse investor has 50% of her portfolio invested in stocks and 50% in risk-free Treasury bills. Show how each of the following events will affect the investor’s budget line and proportion of stocks in her portfolio: A. The standard deviation of the return on the stock market increases, but the expected return on the stock market remains the same. B. The expected return on the stock market increases, but the standard deviation of the stock market remains the...

An institutional investor wishes to sell part of their bond portfolio. Which of the following risk...

An institutional investor wishes to sell part of their bond portfolio. Which of the following risk factors is most significant in affecting the cost of this transaction? Credit risk Liquidity risk Reinvestment risk

An investor has two bonds in his portfolio that have a face value of $1,000 and...

An investor has two bonds in his portfolio that have a face value of $1,000 and pay a 12% annual coupon. Bond L matures in 18 years, while Bond S matures in 1 year. Assume that only one more interest payment is to be made on Bond S at its maturity and that 18 more payments are to be made on Bond L. What will the value of the Bond L be if the going interest rate is 5%? Round...

Subjects