2. In principle, diversification is a tool that reduces risk at the expense of e
ID: 2819167 • Letter: 2
Question
2. In principle, diversification is a tool that reduces risk at the expense of expected returns. True or False? 3. When the data leakage accident occurred to Facebook, the stock prices of other social media companies also dropped together. Why did such an event happen? Select all possible answers. (a) The data leakage accident of Facebook is systematic risk because Facebook has more than 1 (b) Investors of other SNS companies realized they have underestimated the chance of data leakage (c) Facebook users are likely to quit other SNS websites as well because they've got more (d) The data leakage is a new type of firm-specific risk which investors haven't thought about in the billion active users. accidents. concerned about the security issue. traditional economy. So, the investors decided to increase the risk-free rate. 4. When the Facebook's stock price went down due to the data leakage accident, we should buy Facebook's stock because the stock price that dropped due to the idiosyncratic shock will recover quickly. True or False?Explanation / Answer
Ans 2
True. Diversification reduces risk. and it risk can be lowered only at the cost of expected returns.
Ans 3
(b) Investors of other SNS companies realized they have underestimated the chance of data leakage accidents.
(d) The data leakage is a new type of firm-specific risk which investors haven't thought about in the traditional economy. So, the investors decided to increase the risk-free rate.
Ans 4
False. I would not buy Facebook stock in anticipation that it will recover quickly. Reason being the stock plunged not only due to data leakage accident but also due to poor results. So the speedy recovery is possible only after facebook come with good results or better future plans. It is not likely that stock will recover very quickly because it dropped due to idiosyncratic shock becasue data leakage is big issue for any company holding so much of data in billions. Even the data leakage will follow the law suits against the company which could also affect the existence of the company itself if we stretch our imagination of possibilities.
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