Select all that are true with respect to systematic and unsystematic risk. Group of answer choices Systematic risk is unimportant when estimating expected returns Unystematic risk is unimportant when estimating expected returns Total risk (Systematic + Unsystematic) is the key risk measure one needs to estimate expected returns In a well diversified portfolio, unsystematic risk is largely eliminated A key reason why the risk-return tradeoff is better for portfolios than in individual assets is because combining assets into portfolios reduces unsystematic risk A key reason why the risk-return tradeoff is better for portfolios than in individual assets is because combining assets into portfolios reduces systematic risk

Select all that are true with respect to systematic and unsystematic risk. Group of answer choices Systematic risk is unimportant when estimating expected returns Unystematic risk is unimportant when estimating expected returns Total risk (Systematic + Unsystematic) is the key risk measure one needs to estimate expected returns In a well diversified portfolio, unsystematic risk is largely eliminated A key reason why the risk-return tradeoff is better for portfolios than in individual assets is because combining assets into portfolios reduces unsystematic risk A key reason why the risk-return tradeoff is better for portfolios than in individual assets is because combining assets into portfolios reduces systematic risk

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 3QE

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Question 1: What is the rationale for the positive correlation between risk and expected return? Question 2: Why is it possible to eliminate unsystematic risk in a well-diversified portfolio? Likewise, why is it not possible to eliminate systematic risk?
What assumption about risk-adjusted techniques for measuring performance poses a potential problem? A. Portfolio risk is constant over time B. Returns are normally distributed C. Mean reversion D. None of the options are correct.
Which of the following statements regarding unsystematic risk is accurate? Multiple Choice It is measured by beta. It is compensated for by the risk premium. It can be effectively eliminated by portfolio diversification. It is measured by standard deviation. It is related to the overall economy.
Markowitz theory indicates to create and construct a portfolio of assets to maximize returns within a given level of risk, or to devise one with a desired, specified and expected level of return with the least amount of risk. Under this broader concept, answer the followings two questions: Question no 1 Justify with detail explanation, why an optimal portfolio should lie on security market line curve
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Select all that are true. The risk-return tradeoff is generally worse for individual assets than for portfolios because Group of answer choices combining assets into portfolios reduces risk without reducing expected returns by combining assets into portfolios, one can hold risk constant and get a higher expected return by combining assets into portfolios, one can hold expected return constant and reduce risk by combining assets into portfolios, one eliminates risk and still has a positive expected return
.Which performance measure(s) contend(s) that unique risk should theoretically be non-existent in a completely diversified portfolio and performance evaluation should thus only focus on the portfolio's un-diversifiable systematic risk. 1. Variance 2. Sharpe 3. Jensen 4. Treynor
What is the relationship between correlation and the risk of the portfolio's rate of return? i. Higher correlation means greater risk reduction ii. Higher correlation means lower risk reduction iii. Lower correlation means lower risk reduction iv. Lower correlation means greater risk reduction v. None of the above
What assumption about risk-adjusted techniques for measuring performance poses a potential problem? A. Portfolio risk is constant overtime B. Returns are normally distributed C. Mean reversion D. None of the options are correct E. Lognormal outcome of prices
Discuss how risk can be reduced by diversification in a two-asset portfolio. Your discussion should include the impact of correlation and covariance on a portfolio. Use examples to show the main drivers that bring down the risk of a two-asset portfolio.
Describe why a fully diversified portfolio is said to have no unsystematic risk but has systematic risk? Then describe how the Arbritrage Pricing Theory (APT) has a cause and effect on the expected return of a security.
Which of the following statements is correct concerning a mean-variance efficient portfolio of risky assets in a world where there is also a risk-free asset? OA. It will be impossible to form a different portfolio yielding a lower level of risk unless the portfolio also earns a lower return, O B. Risk averse investors will only choose to invest in the market portfolio (M) regardless of the risk-free rate. OC. The portfolio will always achieve the maximum possible returns. O D. The portfolio will always be inside the feasible set.