14. Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 2.0, and standard deviations of 30%. The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero. Which of the following statements best describes the characteristics of your 2-stock portfolio? 13. Which statements are true about systematic and unsystematic risk? 1. "systematic risk" is also known as "market risk;" "unsystematic risk" is also known as "diversifiable risk" II. systematic risk is what is left after diversification has eliminated all company specific risks III. systematic risk includes factors that affect most firms such as war, inflation and interest rates IV. unsystematic risks are specific to an individual company V. unsystematic risks can be eliminated through diversification 12. Which statement is true when using historical data? The probability of a price increase equals the probability of a price decrease in the very short term The farther back you go the more relevant information you have The past is the best predictor of the future Short term data closely reflects the current status 11. Which of the following statements is CORRECT? If portfolios are formed by randomly selecting stocks, a 10- stock portfolio will always have a lower beta than a one- stock portfolio A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. A two-stock portfolio will always have a lower beta than a one-stock portfolio. A stock with an above-average standard deviation must also have an above average beta. 10. Which of the following statements is CORRECT? The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future. The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF. 9. Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio? Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk. m Adding more such stocks will increase the portfolio's expected rate of return. Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk. Adding more such stocks will have no effect on the portfolio's risk. m Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk. 8. Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio? 14. Your portfolio consists of $50,000 invested in Stock X and $50,000 invested in Stock Y. Both stocks have an expected return of 15%, betas of 2.0, and standard deviations of 30%. The returns of the two stocks are independent, so the correlation coefficient between them, rXY, is zero. Which of the following statements best describes the characteristics of your 2-stock portfolio? 13. Which statements are true about systematic and unsystematic risk? 1. "systematic risk" is also known as "market risk;" "unsystematic risk" is also known as "diversifiable risk" II. systematic risk is what is left after diversification has eliminated all company specific risks III. systematic risk includes factors that affect most firms such as war, inflation and interest rates IV. unsystematic risks are specific to an individual company V. unsystematic risks can be eliminated through diversification 12. Which statement is true when using historical data? The probability of a price increase equals the probability of a price decrease in the very short term The farther back you go the more relevant information you have The past is the best predictor of the future Short term data closely reflects the current status 11. Which of the following statements is CORRECT? If portfolios are formed by randomly selecting stocks, a 10- stock portfolio will always have a lower beta than a one- stock portfolio A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. A two-stock portfolio will always have a lower beta than a one-stock portfolio. A stock with an above-average standard deviation must also have an above average beta. 10. Which of the following statements is CORRECT? The beta coefficient of a stock is normally found by regressing past returns on a stock against past market returns. One could also construct a scatter diagram of returns on the stock versus those on the market, estimate the slope of the line of best fit, and use it as beta. However, this historical beta may differ from the beta that exists in the future. The beta of a portfolio of stocks is always smaller than the betas of any of the individual stocks. If you found a stock with a zero historical beta and held it as the only stock in your portfolio, you would by definition have a riskless portfolio. The beta of a portfolio of stocks is always larger than the betas of any of the individual stocks. It is theoretically possible for a stock to have a beta of 1.0. If a stock did have a beta of 1.0, then, at least in theory, its required rate of return would be equal to the risk-free (default-free) rate of return, rRF. 9. Which of the following statements best describes what you should expect if you randomly select stocks and add them to your portfolio? Adding more such stocks will reduce the portfolio's unsystematic, or diversifiable, risk. m Adding more such stocks will increase the portfolio's expected rate of return. Adding more such stocks will reduce the portfolio's beta coefficient and thus its systematic risk. Adding more such stocks will have no effect on the portfolio's risk. m Adding more such stocks will reduce the portfolio's market risk but not its unsystematic risk. 8. Which is the best measure of risk for a single asset held in isolation, and which is the best measure for an asset held in a diversified portfolio