Unsystematic risk is not relevant, because

it does not change

it can be eliminated through diversification.

it cannot be estimated

it cannot be eliminated through diversification.

23.

A highly risk-averse investor is considering the addition of an asset to a 10-stock portfolio. The two securities under consideration both have an expected return, k, equal to 15 percent. However, the distribution of possible returns associated with Asset A has a standard deviation of 12 percent, while Asset B’s standard deviation is 8 percent. Both assets are correlated with the market with r = 0.75. Which asset should the risk-averse investor add to his/her protfolio?

Asset A.

Asset B.

Both A and B.

Neither A nor B.

Cannot tell without more information.

24.

Which of the following statements is false?

Systematic risk will increase during a recession.

Adding more unrelated securities to a portfolio reduces unsystematic risk.

Market risk may be reduced through diversification.

Changes in Federal Reserve policy have more effect on systematic risk than unsystematic risk.

Oil shocks affect market risk.

25.

All of the following statements are true except

The expected return on an asset held by it is the weighted average of the possible outcomes, where the weights reflect the probability of each outcome.

The risk of an asset held by it can be measured by the standard deviation of the expected returns.

The expected return on a portfolio of assets is the weighted average of the expected returns of the assets in the portfolio.

The standard deviation of a portfolio of assets is the weighted average of the standard deviations of the assets in the portfolio.

All of the above statements are true.

26.

You hold a diversified portfolio consisting of a $5,000 investment in each of 20 different common stocks. The portfolio beta is equal to 1.15. You have decided to sell one of your stocks, a lead mining stock whose b = 1.0, for $5,000 net and to use the proceeds to buy $5,000 of stock in a steel company whose b =2.0. What will be the new beta of the portfolio?

1.12

1.20

1.22

1.10

1.15

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