The more positive the degree of correlation between two assets, the greater the risk reduction when the assets are combined. Indicate whether the statement is true or false. ANSWER Answer: FALSE Explanation: The LOWER the degree of correlation between two assets, the greater the risk reduction when the assets are combined.
Define diversification. What are the benefits to diversification? Will diversification always lead to greater expected portfolio returns? What will be an ideal response? ANSWER Answer: Diversification is the practice of spreading your investment among different assets in an attempt to reduce the variability or uncertainty of returns. The benefit lies in the reduction […]
The S&P 500 Bear Plus ETF seeks daily investment results such that its Beta is equal -2. The risk free rate is 3.5% and the market risk premium is 6%. What is the equilibrium expected rate of return on the ETF? A) -19% B) -8.5% C) -2.5% D) 0% E) 3.5% ANSWER B
When considering expected returns, the states of the world must sum to 1 (or 100%). Indicate whether the statement is true or false. ANSWER Answer: TRUE
What is the possible range for a correlation coefficient? For purposes of diversification, what type of correlation coefficient among asset returns is preferred by investors? Explain why. What will be an ideal response? ANSWER Answer: The range for a correlation coefficient is from a perfectly negative correlation of -1.0 to a perfectly positive […]
Define the terms systematic risk and unsystematic risk. Be sure to explain the difference between the two. Which type of risk can be diversified away? How do we measure the remaining type of risk? Evaluate the statement: “If we could just make our investment portfolio large enough, we could completely eliminate risk and earn a […]
The purpose of carrying inventory is to A) have collateral for loans. B) make sales more independent of the production process. C) make different production processes more dependent on sales. D) improve the current ratio. ANSWER B
The measure of systematic risk is called ________. A) correlation B) covariance C) variance D) beta ANSWER Answer: D
Of the following EOQ model assumptions, the most limiting is A) constant unit price. B) uniform demand. C) independent orders. D) constant ordering costs. ANSWER B
The company that prints unemployment insurance checks is named Countercyclical Printing, Inc Countercyclical Printing’s beta is -0.75, the risk free rate is 8%, and the risk premium on the market is 7%. What is the equilibrium expected rate of return on Countercyclical Printing’s stock? A) -8.75% B) -3.25% C) 2.75% D) 4.50% E) 5.25% […]
