1. Assume the risk free interest rate is 3%, the market rate of return is 7% and beta for company X is 2. Given this information, the non-diversifiable risk for this company is a) 8% b) 4% c) 2 d) 6%
1. Assume the risk free interest rate is 3%, the market rate of return is 7% and beta for company X is 2. Given this information, the non-diversifiable risk for this company is a) 8% b) 4% c) 2 d) 6%
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:1. Assume the risk free interest rate is 3%, the market rate of return is 7% and beta for company X
is 2. Given this information, the non-diversifiable risk for this company is
a) 8%
b) 4%
c) 2
d) 6%
2. Referring to question 1, the required rate of return for the company is
a) 2%
b) 9%
c) 8%
d) 11%
3. Referring to question 1, this company has a risk that is
a) Equal to the market risk
b) We cannot tell
c) More than the market risk
d) Less than the market risk
4. Assume that you have a portfolio of two stocks, X and Y. If the risk of stock X is 1.2 and the risk
of stock Y is 4, then the return on stock Y should be
a) Greater than the return on Stock X
b) We cannot tell
c) Less than the return on stock X
d) Equal to the return on stock S
5. If the portfolio in the previous question is well diversified and stocks are strongly negatively
related, then the risk for the portfolio will be
a) Greater than the risk of stock X (i.e. greater than 1.2) but less than the risk on stock Y(i.e less
than 4)
b) We cannot tell
c) Greater than the risk of stock Y (i.e. greater than 4)
d) Less than the risk of stock X (i.e. less than 1.2)
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