Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 11, Problem 4CQ
Diversification True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variances of the individual assets in the portfolio. Explain.
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Diversification True or false: The most importantcharacteristic in determining the expected return of a welldiversified portfolio is the variances of the individual assetsin the portfolio. Explain.
In order to benefit from diversification, the returns on assets in a portfolio must:
Answer
a. Not be perfectly positively correlated
b. Have the same idiosyncratic risks
c. Be perfectly positively correlated
d. Be perfectly negatively correlated
why can variance/volatility of returns be a misleading measure of risk for an individual asset held as part of a portfolio
Chapter 11 Solutions
Corporate Finance
Ch. 11 - Diversifiable and Nondiversifiable Risks In broad...Ch. 11 - Systematic versus Unsystematic Risk Classify the...Ch. 11 - Expected Portfolio Returns If a portfolio has a...Ch. 11 - Diversification True or false: The most important...Ch. 11 - Portfolio Risk If a portfolio has a positive...Ch. 11 - Beta and CAPM Is it possible that a risky asset...Ch. 11 - Covariance Briefly explain why the covariance of a...Ch. 11 - Prob. 8CQCh. 11 - Prob. 9CQCh. 11 - Prob. 10CQ
Ch. 11 - Determining Portfolio Weights What are the...Ch. 11 - Portfolio Expected Return You own a portfolio that...Ch. 11 - Prob. 3QAPCh. 11 - Portfolio Expected Return You have 10,000 to...Ch. 11 - Prob. 5QAPCh. 11 - Prob. 6QAPCh. 11 - Calculating Expected Returns A portfolio is...Ch. 11 - Returns and Standard Deviations Consider the...Ch. 11 - Returns and Standard Deviations Consider the...Ch. 11 - Calculating Portfolio Betas You own a stock...Ch. 11 - Calculating Portfolio Betas You own a portfolio...Ch. 11 - Using CAPM A stock has a beta of 1.15, the...Ch. 11 - Prob. 13QAPCh. 11 - Prob. 14QAPCh. 11 - Prob. 15QAPCh. 11 - Using CAPM A stock has a beta of 1.08 and an...Ch. 11 - Prob. 17QAPCh. 11 - Reward-to-Risk Ratios Stock Y has a beta of 1.15...Ch. 11 - Prob. 19QAPCh. 11 - Portfolio Returns Using information from the...Ch. 11 - Prob. 21QAPCh. 11 - Prob. 22QAPCh. 11 - Analyzing a Portfolio You want to create a...Ch. 11 - Prob. 24QAPCh. 11 - Prob. 25QAPCh. 11 - Prob. 26QAPCh. 11 - Prob. 27QAPCh. 11 - Prob. 28QAPCh. 11 - Prob. 29QAPCh. 11 - Prob. 30QAPCh. 11 - Prob. 31QAPCh. 11 - Prob. 32QAPCh. 11 - Prob. 33QAPCh. 11 - Prob. 34QAPCh. 11 - Prob. 35QAPCh. 11 - Prob. 36QAPCh. 11 - Prob. 37QAPCh. 11 - Prob. 38QAPCh. 11 - Prob. 1MCCh. 11 - Prob. 2MC
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- True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variance of the individual assets in the portfolio. Explain.arrow_forwardIn the context of the Capital Asset Pricing Model (CAPM), the relevant measure of risk is A. standard deviation of returns. B. beta. C. variance of returns. D. unique risk.arrow_forwardThe risk of a portfolio is the variance of its return. However, the variance of the returns of an individual asset is not an appropriate measure of its risk. Discussarrow_forward
- The contribution of an individual asset to the riskiness of a fully diversified portfolio depends primarily on which of the following? The covariance of the asset's return with the return of the rest of the portfolio The variance of the asset's return The covariance of the asset's return with the return on the riskless asset The skewness of the asset's returnarrow_forwardIn the context of the capital asset pricing model, the systematic measure of risk is captured by _________. Group of answer choices unique risk beta standard deviation of returns variance of returnsarrow_forwardassume that every asset has the same expected return and variance. furthermore, all assets have the same covariance with each other. as number of assets in a portfolio grows, which becomes more important: variance or covariance? clarify your answer using words, diagrams, formulae or a practical example.arrow_forward
- The Capital Asset Pricing Model (CAPM) describes a relationship between the expected return of,,, a)An individual share and its variance risk b)An individual share and its standard deviation risk c)An individual share and its undiversifiable risk d)An individual share and its diversifiable riskarrow_forwardIn general, the the correlation between asset returns, the the risk reduction that investors can achieve by diversifying. O a. lower; lower O b. greater; greater O c. lower; greater d. greater; lowerarrow_forwardA plot/graph of the positive relation between systematic risk and expected return is called: O security market line standard deviation and width of the normal distribution O covariance graph O capital asset pricing modelarrow_forward
- Evaluate the following statement: If the financial market is frictionless and complete, the asset with higher expected return also exhibits higher return volatility (i.e., standard deviation of returns).arrow_forwardIntepretation of Beta: Beta measures the sensitivity of the asset's return to variation in the market return. What is meant by that it emasures the sensitiviy of asset return to variation in the market return?arrow_forwardIndicate whether its True or False. Then write the explanation! In the presence of diversification benefits, when we combine two assets together into a portfolio, the systematic risk of the portfolio will be less than the weighted average systematic risk of the individual assets in the portfolio.arrow_forward
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