Question

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Which of the following statements is not always true with respect to the four rules of...

Which of the following statements is not always true with respect to the four rules of portfolio theory

options:

Portfolio realized returns are the weighted average of the realized returns of the individual securities included in the portfolio.

Portfolio weights must sum to one.

None of the answers is correct

Portfolio risk measured as the standard deviation is the weighted average of the standard deviations of the individual securities included in the portfolio.

Portfolio risk measured by beta is the weighted average of the betas of the individual securities included in the portfolio.

Which of the following statements is NOT correct?

options:

A stock with a beta of 1.5 is more risky than the market

A stock with a beta of 0 is risk free

A stock with a lower beta should have a lower expected rate of return than a stock with a higher beta

A stock with a beta of 0.5 is less risky than the market

All the answers are correct

Solutions

Expert Solution

Question 1

Option 4

Return and beta of a portfolio are weighted average of return and beta of individual securities in the portfolio, hnce option 1 and 5 are correct.

Sum of weights of individual securities in a portfolio must amount to 1 hence option 2 is true.

Standard deviation of a portfolio is not the weighted average of standard deviation of individual portfolio hence option 4 is incorrect.

Since option 4 is incorrect, option 3 is invalid.

Question 2

option 5

Makret has a beta of 1, so if has a stock has a beta higher than 1, it is riskier than market hence option 1 is true.

A beta of zero would imply that there is no risk hence option 2 is true

As per CAPM, expected return=Risk free rate+(Market rate-risk free rate)*Beta, as the beta rises, that is stocks get risky, value of expected return rises,hence option 3 is true

Makret has a beta of 1, so if has a stock has a beta lowerer than 1, it is less riskier than market hence option 4 is true.

Since options 1-4 are correct, option 5 is the answer.

jeff jeffy answered 1 year ago
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