Question

In: Finance

T/F -Variance is a measure of the variability of returns, and since it involves squaring the...

T/F

-Variance is a measure of the variability of returns, and since it involves squaring the deviation of each actual return from the expected return, it is always larger than its square root, the standard deviation.

-If an investor owns two stocks, one whose standard deviation is 0.21 and the other whose standard deviation is 0.10, the required return could be higher on the stock with the lower standard deviation.

-Different investors have different degrees of risk aversion but this does not affect investors' asset holdings because everyone holds the market portfolio.

-A stock's beta measures its non-diversifiable risk relative to the non-diversifiable risk of other firms.

-A stock's beta is more relevant as a measure of risk to an investor who holds only one stock than to an investor who holds a well-diversified portfolio

Solutions

Expert Solution

1. Standard Deviation is smaller than the variance, when the variance > 1.0. Equal to the variance if the variance is exactly 1.0 (because the square root of 1 = 1). It is larger than the variance when the variance < 1.0. So variance is not greater than standard deviation when variance < 1.0. Answer is False.

2. A higher standard deviation indicates higher risk or volatility in the stock prices. Hence the required return could be higher on the stock with the higher standard deviation (to compensate for the additional risk). Answer is False.

3. Different investors have different degrees of risk aversion and it does effect their choice of assets, asset allocation etc. All investors do not hold the same portfolio. Answer is False.

4. Beta, is the measure of asset sensitivity to a movement in the overall market. It is a measure of the volatility, or systematic risk, of a security or portfolio in comparison to the market. Answer is False.

5. When you hold a single stock, the beta will give you the picture of how sensitive that stock is as compared to the market. However when you hold a well diversified portfolio, you have already some of its risk and reduced its sensitivity to the market movement. Answer is True.


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