Corporate Finance Chapter 8

Which of the following statements best describes what would be expected to happen as you randomly add stocks to your portfolio?

Adding more stocks to your portfolio reduces the portfolios company-specific risk.

Which of the following statements is correct?

It is possible to have a situation in which the market risk of a single stock is less than the market risk of a portfolio of stocks. The market risk premium will increase if, on average, market participants become more risk averse. If you selected a group of stocks whose returns are perfectly positively correlated, then you could end up with a portfolio for which none of the unsystematic risk is diversified away. All of the statements above are correct.

Investment risk refers to the chance that some unfavorable event will occur.

True False

The CAPM says that the relevant risk of an individual asset is its:

portfolio or market risk

Expressing investment results as rates of return addresses:

scale of investment problems. timing of return problems. both a and b

What is a measure of market risk which is the extent to which the returns on a stock move with the market?

Beta

Empirical studies show that the CAPM is completely valid.

False

For virtually all portfolios, the riskiness of the portfolio is a weighted average of the riskiness of the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset.

False

The expected return on an asset is:

a weighted average of the possible returns with the weights equal to the probability that each possible return will occur.

Risk averse individuals will:

always choose the lowest risk alternative. always choose the highest return alternative always ignore risk when making choices neither of the above statements is correct

Risk can be analyzed:

both on a stand-alone and portfolio basis

If investment return is stated in dollars, to make a decision regarding return adequacy you also need to know:

both the scale of investment and the timing of the return

Which of the following statements are correct?

diversifiable risk can be eliminated by proper diversification market risk cannot be eliminated by proper diversification a and b are correct

The standard deviation:

is a stand-alone risk measure provides an idea of how far above or below the expected value the actual value is likely to be a and b are correct

The coefficient of variation:

is a stand-alone risk measure shows the risk per unit of return a and c are correct

For a portfolio, the weighted average of the expected returns for the individual assets in the portfolio with the weights equal to the fraction of the total portfolio funds invested in each asset is called the:

the portfolio expected return