Question

T/F

The variance of an asset's return can be less than the standard deviation of that asset's return.

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 will be higher for the stock with the higher standard deviation.

Different investors have different degrees of risk aversion, and the result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk.

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

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

Portfolio A has one security, while Portfolio B has 100 securities. Portfolio A can be less risky.

Portfolio A has only one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.

Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and in theory, their effects on investment risk cannot be diversified away.

Answer 1

1.The variance of an asset's return can be less than the standard deviation of that asset's return.

TRUE.

variance = square of standard deviation = In cases where standard deviation is less than 1, the square ofstandard deviation is less than its value. so variance will be less than standard deviation.

2. 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 will be higher for the stock with the higher standard deviation.

TRUE

A stock with a higher standard deviation i.e. its returns will vary higher than the expected value and hence the overall required return will be greater in this case.

3. Different investors have different degrees of risk aversion, and the result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk.

TRUE

A risk averse investor is the one who prefers lower returns with known risks rather than higher returns with unknown risks.

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

FALSE

Beta is measure of a stock's volatility in relation to the market volatility.

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

FALSE

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

6. Portfolio A has one security, while Portfolio B has 100 securities. Portfolio A can be less risky.

TRUE

Because of diversification effects, we would expect Portfolio B to have the lower relevant risk, but it is possible for Portfolio A to be less risky.

7. Portfolio A has only one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.

FALSE

8. A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.

FALSE

9. Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.

FALSE

Even if the correlation = 1, the portfolio has risk higher than that of each security risk

10. Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and in theory, their effects on investment risk cannot be diversified away.

FALSE

these judgements and their effect on investment risk can be diversified.