Question

In: Finance

T/F -We would generally find that the beta of a single security is less stable over...

T/F

-We would generally find that the beta of a single security is less stable over time than the beta of a diversified portfolio.

-If an investor buys enough stocks, he or she can, through diversification, eliminate most of the diversifiable risk inherent in owning stocks, but as a general rule, it will not be possible to eliminate all market risk.

-A firm cannot change its beta through managerial decisions, including capital budgeting and capital structure decisions.

-Any change in its beta is likely to affect the required rate of return on a stock but this will not affect the stock's price

-The slope of the SML is not affected by investors' aversion to risk. -

Solutions

Expert Solution

- True. The beta of single security is less stable than the diversified portfolio as a diversified portfolio reduces the volatility.

- True , because through diversification an investor can only eliminate the unsystematic or diversifiable risk. It will be zero in case of an efficiently diversified portfolio. Whereas, systematic risk or non- diversifiable risk cannot be eliminated through diversification. Hence, it is not possible to eliminate the whole market risk.

- False, as a firm can change its beta through managerial decisions, including capital budgeting decisions and capital structure decisions.

- False, as a change in beta will change the rate of return on the stock thereby affecting the price of the stock. The price will also change.

-False. The slope of SML is the market risk premium and it reflects the extent of risk aversion of an investor. So a change in the risk aversion will affect the slope of SML.


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