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

T/F

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

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

A firm can 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, which implies that a change in the beta will likely have an impact on the stock's price, other things held constant.

The slope of the SML is determined by investors' aversion to risk. The greater the average investor's risk aversion, the steeper the SML.

The Y-axis intercept of the SML represents the required return of a portfolio with a beta of zero, which is the risk-free rate.

The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line cannot be influenced by a manager's actions.

The Y-axis intercept of the SML indicates the required return on an individual asset.

A security's beta measures its diversifiable risk relative to that of an average stock.

A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.

Solutions

Expert Solution

True the beta of a single security is more stable over time than the beta of a diversified portfolio.
True , because through diversification an investor can only eliminate the unsystematic or diversifiable 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.
False Y-axis intercept of the SML represents the required return of a portfolio with a beta of one, which is the risk-free rate
False The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line cannot be influenced by a manager's actions.
False The Y-axis intercept of the SML indicates the required return on an individual asset.
false A security's beta measures its diversifiable risk relative to that of an average stock.
True A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable.

jeff jeffy answered 1 year ago

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