As one adds more assets to aportfolio in order to achievediversification, what will happen tothe portfolio's risk?OA. The risk will decline asdiversifiable risk is reduced to zero,after which non-diversifiable risk willremain and the riskiness of theportfolio will stabilize.B. It will decline until eventuallyall risk is eliminated.C. It will increase, as the additionof riskier and riskier assets will causeoverall portfolio risk to rise.O D. It will remain the samethroughout the process, as overallportfolio risk is relatively stable.

Diversification is a process in which investors add more assets which are not well correlated to…

As one adds more assets to a portfolio in order to achieve diversification, the portfolio's risk? O A. The risk will decline as diversifiable risk is reduced to zero, after which non-diversifiable risk will remain and the riskiness of the portfolio will stabilize. what will happen to OB. It will decline until eventually all risk is eliminated. OC. It will increase, as the addition of riskier and riskier assets will cause overall portfolio risk to rise. D. It will remain the same throughout the process, as overall portfolio risk is relatively stable.

As one adds more assets to a portfolio in order to achieve diversification, the portfolio's risk? O A. The risk will decline as diversifiable risk is reduced to zero, after which non-diversifiable risk will remain and the riskiness of the portfolio will stabilize. what will happen to OB. It will decline until eventually all risk is eliminated. OC. It will increase, as the addition of riskier and riskier assets will cause overall portfolio risk to rise. D. It will remain the same throughout the process, as overall portfolio risk is relatively stable.

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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Hedging a portfolio a. Will generate above average returns when options expire b. none of the answers given c. Will generate below average returns when options expire without being used d. Will generate riskless payoffs when options expire
Financial advisors generally recommend that their clients allocate more to higher risk–return asset classes (like equities) if their investment horizons are long. Is this advice consistent with the basic M-V model? Does adding a shortfall constraint to the M-V model make a difference? If so, how? If not, why not? Assuming investment opportunities change over time, what type of asset return behavior would justify this advice within the M-V framework?
2. Stock prices and stand-alone risk Risk is the potential for an investment to generate more than one return. A security that will produce only one known return is referred to as a risk-free asset, as there is no potential for deviation from the known expected outcome. Investments that have the chance of producing more than one possible outcome are called risky assets. Risk, or potential variability in an investment's possible returns, occurs when there is uncertainty about an investment's future outcome, such as the return expected to be generated by the investment and realized by an investor. Generally, investors would prefer to invest in assets that have: O A higher-than-average expected rate of return given the perceived risk O A lower-than-average expected rate of return given the perceived risk Read the following descriptions and identify the type of risk or term being described: Description This type of risk relates to the possibility that a firm will not be able to service its…
The recent financial crisis clearly depicted a positive correlation between asset prices and, as a result, could warrant consideration for optimal portfolio strategies. Why would an investor prefer a constrained portfolio optimization approach?
Describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier. Additionally, explain how might the magnitude of the market risk premium impact people's desire to buy stocks?
Exposure to systematic or market risk can be reduced by? A. adding low or negative beta stocks to the portfolio. B. investing in a variety of economic sectors. C. cannot be reduced or avoided. D. diversifying internationally.
One of the most important implications of our discussion of risk and return is the benefit of: O taking risks that you know are certain O pursuing returns that are as high as possible irrespective of the risk O holding a diversified portfolio O reducing risk levels to the risk free rate
Explain the unique risk and the market risk. What risk can be reduced when you diversify your portfolio by investing across many different assets?
In portfolio management, risk reduction is achieved by investing in a portfolio in which the securities Question 3 options:1) have a high covariance 2) have a high correlation coefficient 3) have a low coefficient of variation 4) have a lowcovariance 5) are perfectly positively correlated.
Which of the following is TRUE? High-risk investments always have high returns If you invest in a risky investment, you are guaranteed to have a high return. On average, an investor will earn high returns on a low-risk investment On average across investments and over time, riskier investments have higher returns. A high-risk investment will never have a total loss.
Question Five: Which of the following is not an assumption that underpins the capital asset pricing model (CAPM)? Investors behave in accordance with Markowitz mean-variance portfolio theory. Investors are rational and risk averse. Investors all invest for the same period of time. Investors have heterogeneous expectations about expected returns and return variances for all assets. There is a risk free rate at which all investors can borrow or lend any amount. Capital markets are perfectly competitive, frictionless and efficient. Question Six: Which of the following expressions best describes the slope of the security market line? The slope of the security market line is equal to the Sharpe ratio. The slope of the security market line is equal to the Treynor ratio. The slope of the security market line is equal to alpha. The slope of the security market line is equal to the market risk premium. The slope of the security market line is equal to the standard deviation of the risky…
Answer whether each of the following statements is correct and explain your argument. (a) Well-diversified portfolios with a positive α are over-priced. (b) A well-diversified portfolio eliminates all risks.

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