Question

My question is Q 6, diversification. thank you

Chapter 13 Retum, Risk and the Security Market Line 5. Expected Portfoli d. The directors of Big Widget die in a plane crash. Congress approves changes to the tax code that will increase the top marginal corporate tax rate. The legisla orate tax rate. The legislation had been debated for the previous six months. ed Portfolio Returns (LO1] If a portfolio has a positive investment in every at can the expected return on the portfolio be greater than that on every asset in portfolio? Can it be less than that on every asset in the portfolio? If you answer es to one or both of these questions, give an example to support your answer. Diversification (LO2] True or false: The most important characteristic in determining the expected return of a well-diversified portfolio is the variance of the individual assets in the portfolio. Explain. Portfolio Risk (LO2] If a portfolio has a positive investment in every asset, can the standard deviation on the portfolio be less than that on every asset in the portfolio? What about the portfolio beta? 8 Beta and CAPM [LO4] Is it possible that a risky asset could have a beta of zero? Explain. Based on the CAPM, what is the expected return on such an asset? Is it possible that a risky asset could have a negative beta? What does the CAPM predict about the expected return on such an asset? Can you give an explanation for your answer? 9. Corporate Downsizing (LO1] In recent years, it has been common for companies to experience significant stock price changes in reaction to announcements of mas- sive layoffs. Critics charge that such events encourage companies to fire longtime employees and that Wall Street is cheering them on. Do you agree or disagree? 10. Earnings and Stock Returns (LO1] As indicated by a number of examples in this chapter, earnings announcements by companies are closely followed by, and Frequently result in, share price revisions. Two issues should come to mind. First, nings announcements concern past periods. If the market values stocks based on pectations of the future, why are numbers summarizing past performance relevant? 10, these announcements concern accounting earnings. Going back to Chap- earnings may have little to do with cash flow-so, again, why are they Second, these announceme relevant? UESTIONS AND PROBLEMS folio weights for a port- of

Answer 1

6.True- The most important characteristic in determining the expected return of well diversified portfolio is variance of individual asset in portfolio as in such portfolio the deviations from the mean gives the best idea about the Direction and sensetivity of the stock.

The deviation of individual stock from portfolio mean gives a well understanding about the expected returns.