Label True of False 1. Systematic risk can be diversified away. 2. XXX Corporati

Question

Label True of False

1. Systematic risk can be diversified away.

2. XXX Corporation’s stock has a return of 30% and ZZZ Corporation’s stock has a return of 10%. Therefore XXX Corporation’s stock is the better investment.

3. The equation for the SML is called the CAPM.

4. Statistical studies of the stock market have shown the Beta for U.S. Treasury Bills is 1.0.

5. If the Texaco Corp. has a labor strike, this is an example of Beta risk.

6. Risky stocks will normally plot above the SML and less risky stocks will normally plot below it.

Explanation / Answer

Label True of False 1. Systematic risk can be diversified away. TRUE 2. XXX Corporation’s stock has a return of 30% and ZZZ Corporation’s stock has a return of 10%. Therefore XXX Corporation’s stock is the better investment. TRUE 3. The equation for the SML is called the CAPM. TRUE 4. Statistical studies of the stock market have shown the Beta for U.S. Treasury Bills is 1.0. TRUE 5. If the Texaco Corp. has a labor strike, this is an example of Beta risk. FALSE 6. Risky stocks will normally plot above the SML and less risky stocks will normally plot below it. FALSE

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