Finance Ch 6

Company unique risk can be virtually eliminated with a portfolio consisting of approximately 20 securities

True

Which of the following has historically been the least risky investment?

U.S. Treasury bills

The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio

False

Proper diversification generally results in the elimination of risk.

False

Which of the following is also referred to as idiosyncratic risk?

Company specific risk

Asset allocation is not recommended by financial planners because mixing different types of assets such as stocks with bonds, makes it more difficult to track performance and adjust portfolios to changing market conditions

False

Changes in the general economy, like changes in interest rates or tax laws, represent what type of risk?

Market risk

How can investors reduce the risk associated with an investment portfolio?

Purchase a variety of securities

A stock with a beta of 1 has a systematic or market risk equal to the broad market

True

A stock with a beta of 1.4 has 40% more variability in returns than the average stock

True

Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium

True

The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated.

True