Which of the following is not a correct statement about diversification? Most diversification benefits are realized with just 30 to 40 stocks. Diversification is the process of reducing the riskiness associated with individual assets by spreading an investment across numerous assets. Non-diversifiable risk is the only risk that matters to a diversified investor. There is no limit to the amount of risk that can be eliminated through diversification.

Which of the following is not a correct statement about diversification? Most diversification benefits are realized with just 30 to 40 stocks. Diversification is the process of reducing the riskiness associated with individual assets by spreading an investment across numerous assets. Non-diversifiable risk is the only risk that matters to a diversified investor. There is no limit to the amount of risk that can be eliminated through diversification.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter3: Risk And Return: Part Ii

Section: Chapter Questions

Problem 3MC: You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand...

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The principle of diversification tells us that: Concentrating an investment in two or three large stocks will eliminate all of your risk. Concentrating an investment in two or three large stocks will reduce your overall risk. O Spreading an investment across many diverse assets cannot (in an efficient market) eliminate any risk. Spreading an investment across many diverse assets will eliminate all of the risk. Spreading an investment across many diverse assets will eliminate some of the risk.
Which of the following is correct with respect to diversification? A) Investing in 2 or 3 large stocks will eliminate all of the idiosyncratic risk.B) Investing in 3 companies all within the same industry will reduce most of the systematic risk.C) Investing across many diverse assets will eliminate all of the systematic risk.D) Investing across many diverse assets will eliminate some of the total 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.
There are several ways an investor can diversify his or her investment. One way to diversify is to create a portfolio of several assets and stocks. However, for a small investor, it is not viable to create a portfolio comprised of several stocks and assets. Discuss that what strategy should small investors adapt to get the benefit of diversification?
The principle of diversification tells us that: Concentrating an investment in two or three large stocks will eliminate all of the unsystematic risk. Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. Spreading an investment across many diverse assets will reduce some of the total risk. Spreading an investment across many diverse assets will eliminate all of the systematic risk. Spreading an investment across five diverse companies will not lower the total risk.
You have been hired at the investment firm of Bowers & Noon. One of its clients doesn’t understand the value of diversification or why stocks with the biggest standard deviations don’t always have the highest expected returns. Your assignment is to address the client’s concerns by showing the client how to answer the following questions: What is the Capital Asset Pricing Model (CAPM)? What are the assumptions that underlie the model? What is the Security Market Line (SML)?
Which of the following statements is MOST correct concerning diversification and risk? Select one:Proper diversification generally results in the elimination of riskOnly wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification.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.Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk.
Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model (CAPM)? Investors can buy and sell all securities at competitive market prices without incurring taxes or transactions cost and can borrow and lend at the risk-free interest rate Investors hold only efficient portfolios of traded securities. Investors have homogeneous expectations regarding the volatilities, correlation, and expected returns of securities. Investors have homogeneous risk averse preferences toward taking on risk.
which of the following is FALSE regarding portfolio diversification and risk? Market risk is also known as systematic risk Through diversification, systematic risk can be eliminated. Diversification can reduce risk without an equivalent reduction in expected return Firm specific risk is also known as unsystematic risk Forming a well-diversified portfolio can eliminate about half the risk associated with owning a single stock
Arbitrage is the idea that one can (select the best answer): Group of answer choices Buy and Sell different assets or packages of assets at different prices such you can earn a riskless profit without investing any capital. Earn rates of return greater than the average for the market by successfully “picking” stocks. Earn abnormal returns above what CAPM would predict for a particular security.
From the sentences below, choose the one that DOES NOT fit in the concept of diversification. * An investor should investment her/his money in different types of securites because by doing so she/he will be able to create a compensation effect in which the less good performance of some investments can be compensated by the good performance of other investments. A portfolio constructed of different kinds of investments will, on average, have higher returns and a lower risk than any individual investment found within the portfolio. A very well diversified portfolio should be composed by different types of securities, from different sectors and from different geographical locations. Do not put all your eggs in one basket. In order to have the maximum return, an investor should invest all her/his money in the top 5 best stocks of the market.
Indicate whether the following statements are true or false. a. Investors prefer diversified companies because they are less risky. multiple choice 1 True False b. If stocks were perfectly positively correlated, diversification would not reduce risk. multiple choice 2 True False c. Diversification over a large number of assets completely eliminates risk. multiple choice 3 True False