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Does random diversification increase or decrease the variance of a portfolio? What role do events play...

Does random diversification increase or decrease the variance of a portfolio? What role do events play in the actual return of a portfolio? Is this statement true – “if the event is expected, it is already reflected in the stock price”? Explain. What risk can be diversified away? Beta measures what form of risk? If you have a three stock portfolio and all three stock have betas of 2.0 or more what is the beta of the portfolio? Less than 1, between 1 and 1.99 --- or 2 or more? What do companies use the weighted average cost of capital for? For the same corporation, is a weighted average cost of capital of 8.5% better or worse than a 9.5%? For any corporation, what is the most costly form of capital for that corporation? Debt or Equity. What does beta measure? Is a beta of 2.0 or 1.7 more risky?

2.XYZ Company has a low risk division and a high risk division. If XYZ Company does not use a divisional cost of capital, which division will get the most funding?

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Answer #1

Does random diversification increase or decrease the variance of a portfolio?

Decrease

What role do events play in the actual return of a portfolio?
If events are expected, the stock price already captures that but if the event is a surprise, depending upon the even the stock price would react positively or negatively and thus impact actual returns.

Is this statement true – “if the event is expected, it is already reflected in the stock price”?

Yes

What risk can be diversified away?
Unsystematic risk

Beta measures what form of risk?
Market or Systematic risk

If you have a three stock portfolio and all three stock have betas of 2.0 or more what is the beta of the portfolio? 2 or more

What do companies use the weighted average cost of capital for?
TO evaluate investment projects

For the same corporation, is a weighted average cost of capital of 8.5% better or worse than a 9.5%?
Better

For any corporation, what is the most costly form of capital for that corporation?
Equity

What does beta measure?
Systematic or market risk

Is a beta of 2.0 or 1.7 more risky?
2.0

XYZ Company has a low risk division and a high risk division. If XYZ Company does not use a divisional cost of capital, which division will get the most funding?
High risk division


answered by: ANURANJAN SARSAM
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