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10.6 Diversification in Stock Portfolios
1) Which of the following is not a diversifiable risk?
A) The risk that oil prices rise, increasing production costs
B) The risk of a product liability lawsuit
C) The risk that the CEO is killed in a plane crash
D) The risk of a key employee being hired away by a competitor
2) Which of the following is not a systematic risk?
A) The risk that oil prices rise, increasing production costs
B) The risk that the Federal Reserve raises interest rates
C) The risk that the economy slows, reducing demand for your firm's products
D) The risk that your new product will not receive regulatory approval
3) Which of the following types of risk doesn't belong?
A) Market risk
B) Unique risk
C) Idiosyncratic risk
D) Unsystematic risk
4) Which of the following types of risk doesn't belong?
A) Idiosyncratic risk
B) Undiversifiable risk
C) Market risk
D) Systematic risk
5) Which of the following statements is false?
A) Firm specific news is good or bad news about the company itself.
B) Firms are affected by both systematic and firm-specific risk.
C) When firms carry both types of risk, only the firm-specific risk will be diversified when we combine many firms' stocks into a portfolio.
D) The risk premium for a stock is affected by its idiosyncratic risk.
6) Which of the following statements is false?
A) Because investors are risk averse, they will demand a risk premium to hold unsystematic risk.
B) Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.
C) The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.
D) Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.
7) Which of the following statements is false?
A) Fluctuations of a stock's returns that are due to firm-specific news are common risks.
B) The volatility in a large portfolio will decline until only the systematic risk remains.
C) When we combine many stocks in a large portfolio, the firm-specific risks for each stock will average out and be diversified.
D) The risk premium of a security is determined by its systematic risk and does not depend on its diversifiable risk.
8) Consider a portfolio that consists of an equal investment in 20 firms. For each of these firms, there is a 70% probability that the firms will have a 16% return and a 30% that they will have a - 8% return. Each of these firms returns are independent of each other. The standard deviation of this portfolio is closest to:
A) 2.5%
B) 4.2%
C) 8.8%
D) 11.0%
Use the information for the question(s) below.
Consider an economy with two types of firms, S and I. S firms always move together, but I firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
9) What is the expected return for an individual firm?
A) 14%
B) 3%
C) 5%
D) -5%
10) The standard deviation for the return on an individual firm is closest to:
A) 23.0%
B) 5.25%
C) 15.0%
D) 10.0%
11) The standard deviation for the return on an portfolio of 20 type S firms is closest to:
A) 5.10%
B) 23.0%
C) 15.0%
D) 5.25%
12) The standard deviation for the return on an portfolio of 20 type I firms is closest to:
A) 5.25%
B) 5.10%
C) 15.0%
D) 23.0%
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