FIN 415 CH 11

Portfolio diversification eliminates which of the following? A. Total investment risk B. Reward for bearing risk C. Market-wide risk Unsystematic risk D. Unsystematic Risk

D

Which one of the following represents the amount of compensation an investor should expect to receive for accepting the unsystematic firm-specific risk associated with an individual security? A. Security beta multiplied by the market rate of return B. Market risk premium C. Risk-free rate of return D. Zero

D

Which of the following statements is FALSE? A. Asset-specific risks can be easily diversified with highly correlated assets in a portfolio B. Asset-specific risks can be easily diversified with numerous assets in a portfolio C. Bearing risk is rewarded with higher expected returns D. Only market-wide risks, not asset-specific risks, should earn rewards

A

Which of the following statements is TRUE? A. By investing in varied and numerous assets, an investor is able to virtually eliminate all asset-specific risks in her portfolio, both easily and cheaply. B. It is possible, but not very easy, for an investor to control market-wide risks in his portfolio, and increases in these market-wide risks are costly because they reduce expected returns. C. The most important characteristic in determining the expected return of a well-diversified portfolio is the total variance risks of the individual assets in the portfolio. D. When a portfolio has a positive investment in every one of its assets, its standard deviation cannot be less than that on every asset in the portfolio.

A

Which of the following statements is TRUE? A. If a portfolio has a positive investment in every asset, the standard deviation on the portfolio can be less than that on every asset in the portfolio. B. Labor strikes and part shortages are examples of market-wide systematic risks. C. Market-wide systematic risks can be significantly reduced by diversification. D. Asset-specific unsystematic risks can be substantially reduced with less numerous and less correlated assets in a portfolio.

A

Fill in the blanks: Standard deviation measures ______ risk, while beta measures ______ risk. A. Asset-specific; market-wide B. Market-wide; total C. Total; market-wide D. Total; asset-specific

C