FIN 320 CH 12 Quiz
T/ F : A portfolio comprises two stocks, A and B, with equal amounts of money invested in each. If stock A's stock price increases and that of stock B decreases, the weight of stock A in the portfolio will increase.
True
T/ F : When we combine stocks in a portfolio, the amount of risk that is eliminated depends on the degree to which the stocks face common risks and move together.
True
T/ F: A portfolio of stocks where each stock has a large component of independent risk benefits when they are held in a portfolio because the risk is averaged out by diversification.
True
T/ F: The volatility of an individual stock is more than the volatility of a well-diversified portfolio of stocks
True
T/F : Correlation is the degree to which the returns of two stocks share common risks.
True
T/F : For large portfolios, investors should expect a higher return for higher volatility, but this does not hold true for individual stocks.
True
Which of the following is false? A. Smaller stocks have lower volatility than larger stocks B. Investors do not hold more volatility portfolios without expecting higher returns C. Expected returns should rise proportionately with volatility D. The largest stocks are typically more volatile than portfolios of large stocks
A
What is the sign of the risk premium of a negative-beta stock? (Assume the risk premium of the market portfolio is positive.)
Negative--assuming the market risk premium is positive, the risk premium has the same sign as beta.
There are two ways to calculate the expected return of a portfolio. Either calculate the expected return using the value and dividend stream of the portfolio as a whole, or calculate the weighted average of the expected returns of the individual stocks that make up the portfolio. Which return is higher?
Neither--both calculations give the same answer.
T/ F : If two stocks are perfectly negatively correlated, a portfolio with equal weighting in each stock will always have a volatility (standard deviation) of 0.
False
T/ F : When we form an equally weighted portfolio of stocks and keep increasing the number of stocks in the portfolio, the volatility of the portfolio also increases.
False
T/F : Stocks have both diversifiable risk and undiversifiable risk, but only diversifiable risk is rewarded with higher expected returns.
False
If the return of two stocks has a correlation of 1, what does this imply about the relative movements in the stock prices?
If the price of one stock goes up, the other stock price always goes up as well.