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Which of the following statements is false? Because investors are risk averse, t

ID: 2769853 • Letter: W

Question

Which of the following statements is false?

Because investors are risk averse, they will demand a risk premium to hold diversifiable risk.

The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.

Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.

Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.

Because investors are risk averse, they will demand a risk premium to hold diversifiable risk.

The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.

Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.

Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.

Explanation / Answer

Because investors are risk averse, they will demand a risk premium to hold diversifiable risk.False

The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.True

Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.True

Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.True

Because investors are risk averse, they will demand a risk premium to hold diversifiable risk.False

The risk premium for diversifiable risk is zero, so investors are not compensated for holding firm-specific risk.True

Over any given period, the risk of holding a stock is that the dividends plus the final stock price will be higher or lower than expected, which makes the realized return risky.True

Because investors can eliminate firm-specific risk "for free" by diversifying their portfolios, they will not require a reward or risk premium for holding it.True

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