Diversification works because: Select one: a. Portfolios have higher returns than individual assets. O b. Firm-specific risk can be never be reduced. O c. Stocks earn higher returns than bonds. O d. Unsystematic risk exists. O e. Forming stocks into portfolios reduces the standard deviation of returns for each stock.

Diversification works because: Select one: a. Portfolios have higher returns than individual assets. O b. Firm-specific risk can be never be reduced. O c. Stocks earn higher returns than bonds. O d. Unsystematic risk exists. O e. Forming stocks into portfolios reduces the standard deviation of returns for each stock.

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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Similar questions

Explain why diversifying your portfolio does not always eliminate risk. What are the effects of investing in -- 1. uncorrelated assets; 2. positively correlated assets; 3. negatively correlated assets-- when it comes to risk and diversification
Portfolio provides average risk but much lower return. The key is the negative correlations among individual stocks. True False Answer should be correct(Be fast)
If markets are efficient, periodic (e.g. daily) portfolio returns should have zero serial correlation. True False
Combining securities that are perfectly positively correlated helps to reduce the risk of a portfolio true False
Which statement is NOT correct? Investors can NOT eliminate market risk by adding more stocks to the portfolio. Firm specific risk cannot be eliminated through diversification. Standard deviation of return is a good measure of total risk for a stand-alone security. The only relevant risk for a well-diversified portfolio is non-diversifiable risk.
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.
A Listen An example of the no-arbitrage principle holding would be when all risk-free investments offer investors: A) the same return B) negative returns C) positive returns D) zero return
5
an investment market, understanding the concept of undervalued and overvalued stocks is very important. Hence, a prudent investor must have good knowledge about Beta, Market Rate of Return and Risk Free Rate of Return. Required: a) Being an investor, critically analyse the conditions of undervalued and overvalued stocks
Diversification occurs when stocks with low correlations of returns are placed together in a portfolio. Identify at least one type of firm that might exhibit low correlations of returns with the overall stock market? Explain why the correlations of these firms are expected to be low.
Which one of the following expressions about risk and returns is wrong? A. In general, one reason why a stock is riskier than a bond is that because cash flows from a bond are known and promised, whereas cash flows from a stock are neither known nor promised. B. According to CAPM model, a well-diversified portfolio will have a beta which equals to 0. C. Risk premium is the extra return provided on risky assets to compensate for risk. The difference between risky return and the risk-free return. D. Unexpected return happened because new information came to light which caused our expectations about prices and returns to change.
Which is true with regards to the systematic and unsystematic risk? To mitigate the unsystematic risk, an investor must choose two stocks that has a perfectly negative correlation when establishing ones portfolio of securities A portfolio with stocks that has high Sharpe ratios does not have both unsystematic and systematic risk because then generate excess returns The likes of inflation, recession, changes in interest rates are examples of market risk that can be reduced to zero by a portfolio that is fully diversified Systematic risk can be diversified by choosing stocks that has a small standard deviation but high correlation coefficient since these stocks are less riskier

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