Which of the following statement is TRUE? I. If you hold stock in a winter clothing company and want to reduce risk through diversification, you should add shares of stock from a snow boots company rather than an ice cream company. II. Federal Reserve funds rate increase is an example of diversifiable risk. III. As you add stocks from different companies, you would expect total risk to decrease because of reduced unsystematic risk. IV. Beta is a measure of unsystematic risk.
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Statement I discusses diversification. To effectively diversify and reduce risk, one should combine assets that are not highly correlated. A winter clothing company and a snow boots company are likely to be highly correlated, as both are affected by similar 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
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