Question

Given that the risk-free rate is 5% and the expected return on the market portfolio is 10%, if bush company's beta is 2, what is Dow's expected return?

A. 18%

B. 21%

C. 10%

D. 15%

What is the best measure of risk for an asset that is to be held in isolation (one stock portfolio)?

A. market risk

B. Beta

C. Diversifiable risk

D. Standard deviation

Which is the best measure of risk for choosing an asset which is to be held in isolation? Which is the best measure for choosing an asset to be held as part of a diversified portfolio?

A. standard deviation; beta

B. variance; correlation coefficient

C. standard deviation; correlation coefficiant

D. beta; beta

Answer 1

I have answered the question below

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Answer:

1)

Expected return = RF + beta*(Rm-Rf)

= 5% + 2*(10%-5%)

= 15%

2)

Standard deviation
Because SD or variance measures the total risk of a stock. Other options are incorrect as market risk is not a measure of risk of asset and beta is the measure of volatility with the market. Hence option D

3)

For isolation security the co-efficient of variation is better measure because it considering both mean as well as standard deviation that means it focuses on both risk as well as return.

For diversified portfolio BETA is best measure of risk. Because any stock is having two types of risk one the diversifiable and an diversifiable the portfolio is diversified so it only contains Undiversifiable risk(BETA). So diversified portfolio have to focus much on Undiversifiable risk that is why the beta is best measure of risk for diversified portfolio.

Option A