11 May WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT CONCERNING DIVERSIFICATION AND RISK?
The market rewards the patient investor, for between
1926 and 2008, there has never been a time when an investor lost money if she
held an all-stock portfolio for ten years.
24) The portfolio beta is simply the sum of the betas of
the individual stocks in the portfolio.
25) Which of the following statements is MOST correct
concerning diversification and risk?
A) Risk-averse investors often choose companies from
different industries for their portfolios because the correlation of returns is
less than if all the companies came from the same industry.
B) Risk-averse investors often select portfolios that
include only companies from the same industry group because the familiarity
reduces the risk.
C) Only wealthy investors can diversify their portfolios
because a portfolio must contain at least 50 stocks to gain the benefits of
diversification.
D) Proper diversification generally results in the
elimination of risk.
26) Which of the following statements is MOST correct
concerning diversification and risk?
A) Diversification is mainly achieved by the selection of
individual securities for each type of asset held in a portfolio.
B) Diversification is mainly achieved by the asset
allocation decision, not the selection of individual securities within each
asset category.
C) Large company stocks and small company stocks together
in a portfolio lead to dramatic reductions in risk because their returns are
negatively correlated.
D) Asset allocation is important for pension funds but not
for individual investors.
27) An investor currently holds the following portfolio:
Amount
Invested
8,000 shares
of Stock A $16,000 Beta = 1.3
15,000 shares
of Stock B $48,000 Beta = 1.8
25,000 shares
of Stock C $96,000 Beta = 2.2
The investor is worried that the beta of his portfolio is
too high, so he wants to sell some stock C and add stock D, which has a beta of
1.0, to his portfolio. If the investor wants his portfolio to have a beta of
1.72, how much stock C must he replace with stock D?
A) $18,000
B) $24,000
C) $31,000
D) $36,000
28) Wendy purchased 800 shares of Genetics Stock at $3 per
share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock
has a beta of 1.9, the risk-free rate of return is 4%, and the market risk
premium is 9%. Wendy’s holding period return is
A) 15.0%.
B) 16.5%.
C) 17.6%.
D) 21.1%.
29) You are thinking of adding one of two investments to an
already well- diversified portfolio.
Security A Security B
Expected Return = 14% Expected Return = 16%
Standard Deviation of Standard Deviation of
Returns = 16% Returns =
-20%
Beta = 1.2 Beta = 1.2
If you are a risk-averse investor, which one is the better
choice?
A) Security A
B) Security B
C) Either security would be acceptable because they have
the same beta.
D) Security B, but only if Security B’s required return is
greater than 12%
30) You are going to invest all of your funds in one of
three projects with the following distribution of possible returns:
PROJECT 1 PROJECT
2
Standard Standard
Probability Return Deviation Beta Probability Return Deviation Beta
50%
Chance 22% 12% 1.1 30% Chance 36% 19.5% 1.0
50%
Chance -4% 40% Chance 10.5%
30%
Chance -20%
PROJECT 3
Standard
Probability Return Deviation Beta
10%
Chance 28% 12% 1.2
70%
Chance 18%
20%
Chance -8%
If you are a risk averse investor, which one should you
choose?
A) Project 1
B) Project 2
C) Project 3
D) either Project 1 or Project 2 because they have the same
expected return
31) You are considering investing in Ford Motor Company.
Which of the following are examples of diversifiable risk?
I. Risk
resulting from possibility of a stock market crash.
II. Risk
resulting from uncertainty regarding a possible strike against Ford.
III. Risk resulting from an expensive recall of a Ford product.
IV. Risk
resulting from interest rates decreasing.
A) I only
B) I and IV
C) I, II, III, IV
D) II, III
32) You are considering buying some stock in Continental
Grain. Which of the following are examples of non-diversifiable risks?
I. Risk
resulting from a general decline in the stock market.
II. Risk
resulting from a possible increase in income taxes.
III. Risk resulting from an explosion in a grain elevator owned by
Continental.
IV. Risk
resulting from a pending lawsuit against Continental.
A) I and II
B) III and IV
C) I only
D) II, III, and IV23) The market rewards the patient investor, for between
1926 and 2008, there has never been a time when an investor lost money if she
held an all-stock portfolio for ten years. 24) The portfolio beta is simply the sum of the betas of
the individual stocks in the portfolio. 25) Which of the following statements is MOST correct
concerning diversification and risk?A) Risk-averse investors often choose companies from
different industries for their portfolios because the correlation of returns is
less than if all the companies came from the same industry.B) Risk-averse investors often select portfolios that
include only companies from the same industry group because the familiarity
reduces the risk.C) Only wealthy investors can diversify their portfolios
because a portfolio must contain at least 50 stocks to gain the benefits of
diversification.D) Proper diversification generally results in the
elimination of risk. 26) Which of the following statements is MOST correct
concerning diversification and risk?A) Diversification is mainly achieved by the selection of
individual securities for each type of asset held in a portfolio.B) Diversification is mainly achieved by the asset
allocation decision, not the selection of individual securities within each
asset category.C) Large company stocks and small company stocks together
in a portfolio lead to dramatic reductions in risk because their returns are
negatively correlated.D) Asset allocation is important for pension funds but not
for individual investors. 27) An investor currently holds the following portfolio: Amount Invested8,000 shares
of Stock A $16,000 Beta = 1.315,000 shares
of Stock B $48,000 Beta = 1.825,000 shares
of Stock C $96,000 Beta = 2.2The investor is worried that the beta of his portfolio is
too high, so he wants to sell some stock C and add stock D, which has a beta of
1.0, to his portfolio. If the investor wants his portfolio to have a beta of
1.72, how much stock C must he replace with stock D?A) $18,000B) $24,000C) $31,000D) $36,000 28) Wendy purchased 800 shares of Genetics Stock at $3 per
share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock
has a beta of 1.9, the risk-free rate of return is 4%, and the market risk
premium is 9%. Wendy’s holding period return isA) 15.0%.B) 16.5%.C) 17.6%.D) 21.1%. 29) You are thinking of adding one of two investments to an
already well- diversified portfolio.Security A Security BExpected Return = 14% Expected Return = 16%Standard Deviation of Standard Deviation ofReturns = 16% Returns =
-20%Beta = 1.2 Beta = 1.2I
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