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Which of the following statements is false?
The lower the correlation coefficient, the greater the potential benefits from diversification.
To make the covariance of two random variables easier to interpret, it may be divided by the product of the random variables’ standard deviation. The resulting value is called the correlation coefficient, or simply, correlation.
The risk that remains cannot be diversified away and is called the systematic risk.
In the event of bankruptcy,
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- Which of the following is true? a. Beta of a stock cannot be negative b. SML is an acronym for Stock Market Line c. Holding multiple stocks from the same industry is meaningful diversification d. Undiversifiable risk is known as the systematic riskWhich of the following statements about 'beta' is correct? Is a measure of stand-alone risk. A low beta means that a stock is more volatile than the market Is a measure of a stock's volatility relative to the market. OA high beta means that a stock is less volatile than the marketWhich of the following statements is FALSE? A. When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified. B. The volatility in a large portfolio will decline as the size of the portfolio increases until only the systematic risk remains. OC. The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk. OD. Fluctuations of a stock's returns that are due to firm-specific news are common risks.
- 1.Why will the standard deviation not be a good measure of risk when returns are negatively skewed? 2. What are the risk implications for an investor for a returns series that exhibits fat tails? 3. A price weighted index places more weight on stocks with a higher price, whilst a value weighted index places more weight on stocks with a higher market capitalization. Discuss.Which one of the following expressions about risk and returns is wrong? A. In general, one reason why a stock is riskier than a bond is that because cash flows from a bond are known and promised, whereas cash flows from a stock are neither known nor promised. B. According to CAPM model, a well-diversified portfolio will have a beta which equals to 0. C. Risk premium is the extra return provided on risky assets to compensate for risk. The difference between risky return and the risk-free return. D. Unexpected return happened because new information came to light which caused our expectations about prices and returns to change.1. Suppose stock A has a higher volatility than stock B. According to CAPM, which one is expected to deliver a higher return? A. A B. B C. The information provided is insufficient D. None of above is correct
- The small firm effect refers to the observed tendency for stock prices to behave in a manner that is contrary to normal expectations. Describe this effect and discuss whether it represents sufficient information to conclude that the stock market does not operate efficiently. In formulating your response, consider: (a) what it means for the stock market to be inefficient, and (b) what role the measurement of risk plays in your conclusions about each effect.No matter how the stock price fluctuates, as long as it can provide a positive return, the risk of investing in stocks is low.If the concept of standard deviation is applied, is this true or false?Which of the following statements is CORRECT? a. Portfolio diversification reduces the variability of returns on an individual stock. b. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events. c. The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. d. A stock with a beta of −1.0 has zero market risk if held in a 1-stock portfolio. e. When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market.
- Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE? a. Sometimes, during a period when the company is undergoing a change such as toward more leverage or riskier assets, the calculated beta will be drastically different from the "true" or "expected future" beta. b. The beta of an "average stock," or "the market," can change over time, sometimes drastically. c. Sometimes the past data used to calculate beta do not reflect the likely risk of the firm for the future because conditions have changed. d. All of the statements above are true. e. The fact that a security or project may not have a past history that can be used as the basis for calculating beta.A stock that has a negative beta tends to a. move up when the market as a whole moves down. b. move down when the market as a whole moves down. c. be volatile compared to the market as a whole. d. be stable compared to the market as a whole.Which of the following statements concerning the Efficient Market Hypothesis is correct? Select one: a. Stock market prices are based on speculation not on underlying information b. New information that confirms investor expectations should change stock prices c. Stock prices should slowly respond when unexpected information becomes available d. Careful research can help investors earn abnormal profits e. Your return on investment should reflect the riskiness of your portfolio
