Question

PLEASE EXPLAIN WHY ANSWER IS TRUE OR FALSE:

1. "Risk aversion" implies that investors require higher expected returns on riskier than on less risky securities.

a.   True                                                   

b.   False

2. When adding a randomly chosen new stock to an existing portfolio, the higher (or more positive) the degree of correlation between the new stock and stocks already in the portfolio, the less the additional stock will reduce the portfolio's risk.

a.   True

b.   False

3. An individual stock's diversifiable risk, which is measured by its beta, can be lowered by adding more stocks to the portfolio in which the stock is held.

a.   True

b.   False

4. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the market risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all diversifiable risk.

a.   True

b.   False

5. Under the CAPM, the required rate of return on a firm's common stock is determined only by the firm's market risk. If its market risk is known, and if that risk is expected to remain constant, then analysts have all the information they need to calculate the firm's required rate of return.

a.   True

b.   False

6. The slope of the SML is determined by the value of beta.

a.   True

b.   False

7. The SML relates required returns to firms' systematic (or market) risk. The slope and intercept of this line can be influenced by a manager's actions.

a.   True

b.   False

Answer 1

Answer to first question in the list: TRUE Reason: The term risk aversion refers to investors' rational behavior in expecting lower return from the investment options that are associated with lower risk; On ther hand, expecting higher return from the investment options that are associated with higher risk. Therefore, it is evidenced from the definition of risk aversion that investors expect higher returns on risky securities and lower returns on less risky securities. And so, given statement is true.