Hi, giving points to help me with these questions : 1.The correlation coefficien

Question

Hi, giving points to help me with these questions :

1.The correlation coefficient between well diversified portfolio A (50 different assets) and well diversified portfolio B (50 different assets) is -.7.

A new portfolio of A and B together will be less risky than a portfolio that is composed of either just the assets in Portfolio A or just the assets in portfolio B.

AnswerTrue or False

2.Plastics, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2.25 percent annually. How much are you willing to pay for one share of this stock if you require a 16 percent return?

True or False

3.Assume that common stock values are consistent with the following model:

E(Rx) = rf + Bx{E(Rm)- rf)}

E(Rx) = required return on asset x.

rf = risk free rate of interest

Bx = Beta of security x.

E(Rm) = expected return on market portfolio.

E(Rm)- rf = market risk premium

4.If the risk free rate of interest increases but the required risk premium for security x remains the same; the expected return on security x be less than the required return on security x until the price of security x falls.

Answer

True or False

5.Which one of the following is the best example of unsystematic risk?

Answer A.Inflation exceeding market expectations

B.A Warehouse fire

C.Decrease in the value of the dollar

D.Decrease in value of the dollar

E.Increase in Consumer spending

Explanation / Answer

1. True. Since the portfolio is negatively correlated if value of one portfolio increases the other will decrease therefore reducing the variance therefore the risk.

2. 1.85/(1.16)+1.85*1.025/1.16^2+1.85*1.025^2/1.16^3+...

using geometric progression forumla a/(1-r) where a=1.85/1.16 and r= 1.025/1.16

therefore S= 1.85/(1.16-1.025)=13.70

3. This does not seem like a question. But the explanation and the formula given is right.

4. False

5. A ware house fire since it is specific to a certian industry and unsystmeatic risk is defined as company or industry specific risk. So a ware house fire is limited to only certain industry whereas the rest of the options affect all industries as a whole.

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