FIN 534 – Homework Chapter 6

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FIN 534 – Homework Chapter 6

 

1. You are considering investing in one of these three stocks:

 

Stock

Standard Deviation

Beta

A

20%

0.59

B

10%

0.61

C

12%

1.29

 

If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

 

 

 

2. Your friend is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. She is highly risk averse and has asked for your advice. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?

 

 

 

 

3. Which of the following is NOT a potential problem when estimating and using betas, i.e., which statement is FALSE?

 

 

 

 

4. Stock A's beta is 1.7 and Stock B's beta is 0.7. Which of the following statements must be true about these securities? (Assume market equilibrium.)

 

 

 

 

 

5. Which of the following statements is CORRECT?

 

 

 

 

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