True or False. If False Justify (\"If False, justify...\") your answer in one se

Question

True or False. If False Justify ("If False, justify...") your answer in one sentence. A security with a negative beta should have a negative expected return. 1. a. According to portfolio theory, a manager should avoid investing in a positive NPV project if it significantly increases the risk of the firm. b. The contribution of a security to the risk of a well diversified portfolio depends on its beta c. d. Since investors can diversify, they should not be concerned with the variance of their portfolio returns. If the returns of two assets are perfectly positively correlated then there is no benefit to diversification. e. f. The S&P; 500 Index has a mean annual return of about 12% and a standard deviation of about 20%. The annual standard deviation of the returns of a typical stock in the index is less than 20%. g. If a stock lies below the security market line, it is undervalued.

Explanation / Answer

As per rules I will answer the first 4 sub parts of the question

a. False

(Beta is a measure of the relationship between a particular security's return and the overall return of the market. It is a measure of the non-diversifiable risk of a security. Expected return= Rf+ Beta*(Rm-Rf)

Expected return may be positive depending upon the value of Market return.

b. True

As per portfolio theory investors are risk averse. Hence the manager should not invest in a positive NPV project if it increases the risk.

c.True

Beta is a measure of non diversifiable risk. The risk thus of a well diversified portfolio depends entirely on the risk of the individual securities included in that portfolio, as measured by beta

d. True

The portfolio variance can be reduced by way of diversification.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.