The historic beta of a firm is of little use as a forecast of the firm's future systematic risk characteristics when Group of answer choices All of the options are correct the firm is expanding into a new product line the firm is growing at a rate of 7-10 percent a year the firm is expanding an existing product line
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Beta measures a firm's systematic risk relative to the market. A historic beta reflects past performance and risk characteristics. Show more…
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3. Which of the following would be considered as an example of systematic risk? I. Lower trade deficit than expected II. Quarterly profit for Samsung equals expectations III. Lower quarterly sales for Samsung than expected I only II only III only I and II only I, II, and III 4. Which of the following is true concerning diversification? The risk of the portfolio is certain to be increased as securities are added. As more securities are added to the portfolio, the market risk of the portfolio declines. As more and more securities are added to the portfolio, the level of risk approaches the level of systematic risk in the market. If you hold more than 100 securities, then the portfolio is risk-free. 5. Which of the following is true regarding the beta coefficient? It is a measure of unsystematic risk A beta greater than one represents lower systematic risk than the market Generally speaking, the higher the beta the higher the expected return A beta of one indicated an asset is totally risk-free The risk premium of an asset will increase if the beta of that asset decreases 6. All else the same, actionsevents that cause firm returns to be less correlated with changes in the economy will ( ) the firm’s systematic risk. increase decrease not affect affect (direction not determinable) increase the firm’s unsystematic risk but not affect 7. Which of the following would have the lowest amount of systematic risk? A portfolio of the common stocks of 100 different companies The market portfolio A portfolio half invested in the market portfolio and half invested in government bonds A portfolio half invested in the market portfolio and half invested in stocks with betas=1.50 A portfolio made up entirely of government bonds 8. Which of the following would increase a portfolio’s systematic risk? I. Common stock is sold and replaced with government bonds II. Stocks with a beta equal to the market beta are added to a portfolio of government bonds III. Low-beta stocks are sold and replaced with high-beta stocks I only II only III only I and II only II and III only
Akash M.
The beta of a firm's stock indicates the degree to which changes in stock price track changes in the stock market as a whole and is interpreted as the market risk of the portfolio. A beta of 1.0 indicates that, on average, the stock rises (or falls) the same percentage as does the market. A beta of 2.0 indicates a stock that rises or falls at twice the percentage of the market. The beta of a stock portiolio is the weighted average of the betas of the individual stock securities, weighted by the current market values (market value is share price times number of shares). Consider the following portfolio: 100 shares Speculative Computer at $$\$ 35$$ per share, beta $=2.4$ 200 shares Conservative Industries at $$\$ 88$$ per share, beta $=0.6$ 150 shares Dependable Conglomerate at $$\$ 53$$ per share, beta $=1.2$ a. Find the beta of this portfolio. b. To decrease the risk of the portfolio, you have decided to sell all shares of Speculative Computer and use the money to buy as many shares of Dependable Conglomerate as you can. ${ }^{16}$ Describe the new portfolio, find its beta, and verify that the market risk has indeed decreased.
Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors' dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will happen to the rates of return on low-risk and high-risk investments. Which will have a larger increase in average expected rates of return, investments with high betas or investments with low betas? And will high-beta or low-beta investments show larger percentage changes in their prices?
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