Fin 534 Homework Chapter 6

STRAYER FIN 534 Homework Chapter 6

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FIN 534 Homework Chapter 6

 1. Which of the following statements is CORRECT?

 a. If you add enough randomly selected stocks to a portfolio, you can completely eliminate all of the market risk from the portfolio.

 b. If you were restricted to investing in publicly traded common stocks, yet you wanted to minimize the riskiness of your portfolio as measured by its beta, then according to the CAPM theory you should invest an equal amount of money in each stock in the market. That is, if there were 10,000 traded stocks in the world, the least risky possible portfolio would include some shares of each one.

 c. If you formed a portfolio that consisted of all stocks with betas less than 1.0, which is about half of all stocks, the portfolio would itself have a beta coefficient that is equal to the weighted average beta of the stocks in the portfolio, and that portfolio would have less risk than a portfolio that consisted of all stocks in the market.

 d. Market risk can be eliminated by forming a large portfolio, and if some Treasury bonds are held in the portfolio, the portfolio can be made to be completely riskless.

 e. A portfolio that consists of all stocks in the market would have a required return that is equal to the riskless rate.

 2. Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?

 a. Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.

 b. The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.

 c. Dick's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Jane's portfolio, but the required (and expected) returns will be the same on both portfolios.

 d. If the two portfolios have the same beta,...