Question Easy: [i]. Which of the following statements is most correct?

Easy:

[i]. Which of the following statements is most correct?

a. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.

b. Portfolio diversification reduces the variability of returns on an individual stock.

c. When company-specific risk has been diversified the inherent risk that remains is market risk, which is constant for all securities in the market.

d. A stock with a beta of -1.0 has zero market risk.

e. The SML relates required returns to firms’ market risk. The slope and intercept of this line cannot be controlled by the financial manager.

[ii]. You observe the following information regarding Company X and Company Y:

· Company X has a higher expected mean return than Company Y.

· Company X has a lower standard deviation than Company Y.

· Company X has a higher beta than Company Y.

Given this information, which of the following statements is most correct?

a. Company X has a lower coefficient of variation than Company Y.

b. Company X has more company-specific risk than Company Y.

c. Company X is a better stock to buy than Company Y.

d. Statements a and b are correct.

e. Statements a, b, and c are correct.

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