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If the expected rate of return on a stock is 12% and a risk-free (treasury) security yields 5%, what must be the risk premium for this stock? 0% 12% 5% 7% %u95EE%u9898 21 %u5206 In which of the following situations would you get the largest reduction in risk by spreading your portfolio across two stocks? In which of the following situations would you get the largest reduction in risk by spreading your portfolio across two stocks? The stock returns are independent. The stock returns vary against each other. It depends on the returns of these stocks. The stock returns vary with each other towards the same direction. %u95EE%u9898 31 %u5206 Why do stock market investors appear not to be concerned with unique (firm specific) risks when calculating expected rates of return? Why do stock market investors appear not to be concerned with unique (firm specific) risks when calculating expected rates of return? There is no method to quantify unique risks. They can build portfolios with zero total risk. Unique risks can be eliminated through diversification. Risk premium for risky assets includes a component to compensate for unique risk. %u95EE%u9898 42 %u5206 What is the approximate standard deviation of returns if over the past four years an investment returned 8%, -12%, -13% and 15%? What is the approximate standard deviation of returns if over the past four years an investment returned 8%, -12%, -13% and 15%? 10.26% 13.26% 11.26% 12.26% %u95EE%u9898 52 %u5206%u8DF3%u81F3%u95EE%u9898%u6587%u672C%u3002 You wish to invest in a portfolio of stocks A and B. The risk free rate is 4%. A B Expected return (%) 10 20 Volatility (standard deviation) (%) 15 25 Correlation coefficient between returns 0.3 What's the standard deviation of a portfolio with 30% in stock A? 20.3% 18.3% 21.3% 19.3% %u95EE%u9898 61 %u5206 The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio for which of the following reasons? The standard deviations of individual stocks are generally higher than the standard deviation of the market portfolio for which of the following reasons? Individual stocks have no diversification of risk. Individual stocks offer higher returns. Individual stocks do not have uniques risk. Individual stocks have more systematic risks. %u95EE%u9898 71 %u5206 The risk reduction through diversification in a portfolio of two stocks The risk reduction through diversification in a portfolio of two stocks b. decreases as the correlation between the stocks rises both statements are correct a. increases as the correlation between the stocks declines none of the statements are correct
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