INVESTMENTS-CONNECT PLUS ACCESS
11th Edition
ISBN: 2810022611546
Author: Bodie
Publisher: MCG
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Chapter 7, Problem 5CP
Summary Introduction
To select: The correct statement for portfolio diversification.
Introduction: The combination of a variety of securities in a portfolio with the purpose of reducing the overall risk, portfolio diversification helps in risk management as it reduces the risk.
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Students have asked these similar questions
As one adds more assets to a
portfolio in order to achieve
diversification, what will happen to
the portfolio's risk?
OA. 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.
B. It will decline until eventually
all risk is eliminated.
C. It will increase, as the addition
of riskier and riskier assets will cause
overall portfolio risk to rise.
O D. It will remain the same
throughout the process, as overall
portfolio risk is relatively stable.
Which statement about portfolio diversification is correct?
Proper diversification can eliminate systematic risk.
The risk-reducing benefits of diversification do not occur meaningfully until at least 50-60 individual securities have been purchased.
Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return.
None of the statements are correct.
Equity price risk is the risk that arises from security price Choose.
- the risk of a Choose..
v in the value of a Choose...
v or a portfolio. Equity
price risk can be either systematic or Choose.
v risk. In a global economic crisis, equity price risk is Choose..
because it affects multiple assets
Choose.
volatility
decline
classes.
increase
specific
systematic
security
Chapter 7 Solutions
INVESTMENTS-CONNECT PLUS ACCESS
Ch. 7 - Prob. 1PSCh. 7 - Prob. 2PSCh. 7 - Prob. 3PSCh. 7 - Prob. 4PSCh. 7 - Prob. 5PSCh. 7 - Prob. 6PSCh. 7 - Prob. 7PSCh. 7 - Prob. 8PSCh. 7 - Prob. 9PSCh. 7 - Prob. 10PS
Ch. 7 - Prob. 11PSCh. 7 - Prob. 12PSCh. 7 - Prob. 13PSCh. 7 - Prob. 14PSCh. 7 - Prob. 15PSCh. 7 - Prob. 16PSCh. 7 - Prob. 17PSCh. 7 - Prob. 18PSCh. 7 - Prob. 19PSCh. 7 - Prob. 20PSCh. 7 - Prob. 21PSCh. 7 - Prob. 22PSCh. 7 - Prob. 23PSCh. 7 - Prob. 1CPCh. 7 - Prob. 2CPCh. 7 - Prob. 3CPCh. 7 - Prob. 4CPCh. 7 - Prob. 5CPCh. 7 - Prob. 6CPCh. 7 - Prob. 7CPCh. 7 - Prob. 8CPCh. 7 - Prob. 9CPCh. 7 - Prob. 10CPCh. 7 - Prob. 11CPCh. 7 - Prob. 12CPCh. 7 - Prob. 13CP
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- Adding alternative investments to a traditional portfolio can increase expected returns and reduce systematic risk. Select one: True Falsearrow_forwardwhich 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 stockarrow_forwardFinance Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that: Group of answer choices decreases to a level below that of either asset. remains unchanged. increases to a level above that of either asset. stabilises to a level between the asset with the higher risk and the asset with the lower risk.arrow_forward
- Which of the following statements regarding non-systematic risk, systematic risk and total risk is/are true? Select one or more:a. As the number of assets within a portfolio increases, the total risk of a portfolio will go to zero.b. A riskfree asset must have zero non-systematic risk.c. A well diversified portfolio must have zero systematic riskd. Under the Capital Asset Pricing Model (CAPM).an asset with zero systematic risk must have expected return equal to the riskfree rate.arrow_forwardWhich 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.arrow_forwardExposure 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.arrow_forward
- When diversification completely reduced the non-systematic risk of a portfolio a. The return of the portfolio becomes 0 b. The portfolio’s remaining risk is only the beta c. The portfolio is no longer subject to any risk d. The risk of the portfolio will increase drastically Option 2arrow_forwardExplainarrow_forwardWhich of the following statements is correct? A delta-neutral portfolio is protected against large changes in the underlying asset price. The delta hedging error increases as gamma decreases. To change the vega of a portfolio, we need to trade the portfolio’s underlying asset. A delta-neutral portfolio needs to be rebalanced more frequently as the gamma increases to maintain delta-neutrality. Please explain and justify your choice using your own words.arrow_forward
- 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.arrow_forwardDiversification refers to the _________.a. reduction of the stand-alone risk of an individual investment, measured by its beta coefficient, by combining it with other investments in a portfolio b. reduction of the stand-alone risk of an individual investment, measured by the standard deviation of its returns, by combining it with other investments in a portfolio c. reduction of systematic risk of an individual, measured by its beta coefficient, by combining it with other investments in a portfolio d. reduction of systematic risk of an individual, measured by the standard deviation of its returns, by combining it with other investments in a portfolio e. reduction of the unsystematic risk of an individual, measured by its coefficient of variation, by combining it with other investments in a portfolioarrow_forwardWhen diversification completely reduced the non-systematic risk of a portfolio a. The return of the portfolio becomes 0 b. The portfolio’s remaining risk is only the beta c. The portfolio is no longer subject to any risk d. The risk of the portfolio will increase drastically It is forecasted, in the coming years, that the market risk premium is expected to fall while the risk free rate is expected to remain at the same level. Based on this forecast, which of the statement holds true for the stocks’ required return? a. The require return for all the stocks will decline by the same amount b. The required return will fall for all stocks but will fall more for stocks with higher betas c. The required return on all stocks will remain unchanged d. Required return will fall for all stocks but will decline less for stocks with higher betas Which of the following statements is false? a. The slope of the security market line is measured by beta. b. Company-specific risk can be diversified…arrow_forward
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