A fund manager decides to diversify investment holdings and purchases shares in 40 different U.S. stocks...
- A fund manager decides to diversify investment holdings and purchases shares in 40 different U.S. stocks in a number of different industries. Which of the following would be the appropriate measure of the risk and required rate of return for the portfolio?
- Beta and the capital asset pricing model (CAPM)
- Correlation matrix and the return on investment
- Standard deviation and discounted cash flow
- Coefficient of variation and expected return on equity
Homework Answers
(a) Beta and the Capital Asset Pricing Model (CAPM)
Explanation: The risk can be divided into systematic and unsystematic risk. In a well diversified portfolio, unsystematic risk is cancelled out and the only relevant risk is systematic risk which is captured by beta. The return on an well diversified portfolio is calculated by CAPM model
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A fund manager decides to diversify investment holdings and
purchases shares in 40 different U.S. stocks...
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