5. Portfolio risk and diversificationA financial planner is examining the portfolios held by several of her clients. Which of the following portfolios is likely to have the smallest standarddeviation?O A portfolio consisting of about 30 randomly selected stocks.O A portfolio consisting of about 30 energy stocks.O A portfolio containing only Chevron stock.Portfolio managers pick stocks for their clients' portfolios based on the investment objective of the portfolio and several other factors. One keyconsideration is each stock's contribution to portfolio risk and its statistical relationship with the portfolio's other stocks.Based on your understanding of portfolio risk, identify whether each statement is true or false.StatementTrueFalseWhen returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B arepositively correlated.The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio.The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio.A portfolio's risk is not equal to the weighted average of the individual stocks' standard deviations.O ooO oo

Standard deviation is a measure of risk. The standard deviation or risk of a portfolio is least when…

Statement True False When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated. The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio. The risk in a portfolio will increase more stocks that are negatively correlated with other stocks are added to the portfolio. A portfolio's risk is not equal to the weighted average of the individual stocks' standard deviations. ololo

Statement True False When returns on Stock A increase, returns on Stock B also increase. In general, this would mean that Stocks A and B are positively correlated. The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio. The risk in a portfolio will increase more stocks that are negatively correlated with other stocks are added to the portfolio. A portfolio's risk is not equal to the weighted average of the individual stocks' standard deviations. ololo

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

If markets are efficient then: All stocks will have the same expected returns All stocks will have the same risk Two stocks will the same volatility will have the same expected returns Two stocks with the same priced risks will have the same expected returns
According to the CAPM, a stock's expected return is positively related to its beta. True or False True False
Which of the following(s) would be ways to reject the CAPM? a showing that there exist a stock with zero beta with the market earns an expected return higher than the risk free rate b showing that there exist a stock that earns higher expected return than the market c Showing that a portfolio consistently generates a negative alpha d Showing that a certain factor predicts expected return even after controlling for market beta
Select all that are true with respect to systematic and unsystematic risk. Group of answer choices Systematic risk is unimportant when estimating expected returns Unystematic risk is unimportant when estimating expected returns Total risk (Systematic + Unsystematic) is the key risk measure one needs to estimate expected returns In a well diversified portfolio, unsystematic risk is largely eliminated A key reason why the risk-return tradeoff is better for portfolios than in individual assets is because combining assets into portfolios reduces unsystematic risk A key reason why the risk-return tradeoff is better for portfolios than in individual assets is because combining assets into portfolios reduces systematic risk
Which one of the following statements is correct? When more stocks are added into a portfolio, the beta of that portfolio will a) always decrease. The beta of ABC and XYZ is 1.95 and 0.88, respectively. This information b) implies that ABC has less market risk than XYZ. A stock has a beta of 1.5. It implies that this stock has lower total risk than c) the overall market. The beta of ABC and XYZ is 1.95 and 0.88, respectively. This information implies that ABC has higher total risk than XYZ. The risk premium investors demand from a stock will increase as the beta of the stock increases.
No matter how the stock price fluctuates, as long as it can provide a positive return, the risk of investing in stocks is low.If the concept of standard deviation is applied, is this true or false?
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 of the following statement is true? (a) Correlation has no effect on the expected return of a portfolio. (b) As the correlation between two stocks increases, the volatility of the two-stock portfolio falls. (c) The correlation of a stock's return with itself is zero. (d) None of the above
Stock A has more systematic risk than stock B, stock B has more unsystematic risk than stock A, and it is unclear which stock (A or B) has more total risk. Both stock A and stock B have more systematic risk than the market. Which of the following assertions is most consistent with finance theory? Stock B would have a higher expected return than stock A and stock A would have a higher expected return than the market Stock A would have a higher expected return than stock B and stock A would have a higher expected return than the market Stock B would have a higher expected return than stock A and the market would have a higher expected return than stock A Stock A would have a higher expected return than stock B and the market would have a higher expected return than stock A Because it is unclear which stock (A or B) has more total risk, it is unclear which stock (A or B) would have a higher expected return
1. Suppose stock A has a higher volatility than stock B. According to CAPM, which one is expected to deliver a higher return? A. A B. B C. The information provided is insufficient D. None of above is correct

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