In Figure, why does the line decline steeply at first and then flatten out? The standard deviation
Question:
The standard deviation of a portfolio tends to 60% decline as more stocks are added to the portfolio. The standard 50% deviations of AMD and American Airlines stocks are 56.4% and 47.8% 40% respectively when they are held in isolation However, the standard 30% deviation of a portfolio containing equal investments in both stocks is just 45%. The portfolio is less volatile than either stock in the 10% portfolio. The risk that diversification eliminates is called unsystematic 0% risk. The risk that remains, even in a diversified portfolio, is called systematic risk Portfolio Standard Deviation Advanced Micro Devices Advanced Micro Devices + American Airlines Advanced Micro Devices + American Airlines + Wal-Mart Portfolio of 11 Stocks unsystematic 20% standard deviation of entire stock market-19.8% systematic 2 6 9 10 1 12 7 Number of Stocks 0
Step by Step Answer:
Figure declines steeply at first and then flattens out because as we add more stocks to a ...View the full answer
Introduction to Corporate Finance
ISBN: 978-0324657937
2nd edition
Authors: Scott B. Smart, William L Megginson
Related Video
Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
Students also viewed these Corporate Finance questions
-
Why does marginal physical product decline at a fast food outlet (e.g., McDonald's) when more employees are hired? What are the fixed input constraints that limit worker productivity?
-
Why is it important to flatten the pandemic curve? Briefly describe the two public health strategies of Mitigation and Suppression for controlling the contagion. How might these approaches differ in...
-
Why are the advance decline line called an indicator of breadth of the market?
-
As our energy structure transitions toward renewable fuels, forest-based biomass fuels benefit from this transition. What are the likely effects of this transition on consumers, producers, and the...
-
Discuss the five essential characteristics of cloud computing.
-
Show that the optimal value of the investment in financial markets is given by the expression for \(\epsilon^{*}\) in the text.
-
Jason and the toddler present a classic legal puzzle: What, if anything, must a bystander do when he sees someone in danger? We will examine this issue to see how the common law works. The common law...
-
Shannon Company segments its income statement into its North and South Divisions. The companys overall sales, contribution margin ratio, and net operating income are $ 500,000, 46%, and $ 10,000,...
-
You have decided to open a margin account with your broker and secure a margin loan. The specifics of the account are as follows: Maintenance margin is 40 % You are informe...
-
Prepare the 2015 and 2016 common-size balance sheets for Bethesda Mining. Bethesda Mining Company reports the following balance sheet information for 2015 and 2016. BETHESDA MINING COMPANY Balance...
-
In Chapter 4, we defined several bond return measures, including the coupon, the coupon rate, the coupon yield, and the yield to maturity. Indicate whether each of these measures (a) focuses on the...
-
Explain why the dots in Figure appear to be almost randomly scattered. In contrast to the positive relationship between average returns and standard deviations for assest clases shown previously in...
-
For each of the following, state whether the events created are mutually exclusive and whether they are collectively exhaustive. a. Undergraduate business students were asked whether they were...
-
What is the language accepted by the npda below? 2) (2 points) Write the sequence of moves done by the npda for the input sequence w= abbcdc. Is the string w accepted? a, z, 1z a, 1, 1 b, 1, 2 b, 2,...
-
4. An object is punted at 25.0 m/s [40.0 N of E] on G's home planet. What is the range (x distance) of the object on level ground? (Use g = 18.0 m/s) 5. An elastic loaded balloon launcher fires...
-
You want to buy a small hotel as part of your investment portfolio. You found a hotel in a great location at price of $2,000,000 and signed a mortgage note with a local bank to borrow the whole...
-
The cylindrical plug A of mass m4 in Fig.Q1 is released from rest at B and slides down the rough circular guide with coefficient of kinetic friction k 1. The plug strikes the block C and become...
-
Doppler ultrasound is used to measure the speed of blood flow. The reflected sound interferes with the emitted sound, producing beats. If the speed of red blood cells is 0.100 m/s, the ultrasound...
-
The carbon-14 dating method is based on the assumption that the rate of production of 14 C by cosmic ray bombardment has remained constant for thousands of years and that the ratio of 14 C to 12 C...
-
In Exercises 105108, evaluate each expression without using a calculator. log(ln e)
-
Cooling tower in a steam power plant is a device for (a) condensing steam into water (b) cooling the exhaust gases coming out the boiler (c) reducing the temperature of superheated steam (d) reducing...
-
Calculate the annual arithmetic mean and geometric mean return on the following security, and state which method is more appropriate for the situation: purchase price = $30; first-year dividend = $5;...
-
An investor owns a portfolio of $45,000 that contains $15,000 in stock A, with an expected return of 12 percent; $10,000 in bonds, with an expected return of 8 percent; and the rest in stock B, with...
-
On January 1, FinCorp Inc. published the following forecasts for the economy: During the year you observed quarterly returns of 2 percent, 5 percent, 3 percent, and 8 percent. a. Calculate the ex...
-
Assignments + L C mylabmastering.pearson.com/?courseld=12441334&key=29502259331152563009202023#/ 6 Find Affordable, Na... Microsoft Word - RR... IFRS-IAS 12 Incom... IAS 12 Income Taxes Form IT-201,...
-
Question 8 Not yet answered Points out of 10.00 The amount an investor will have in 25 years if $1,200 is invested today at an annual interest rate of 6.25% will be closest to: Flag question O A....
-
A Toronto based Meal Planning service charges $500 per month for their premium monthly package. Variable costs are about $200 per package per month. With an attrition of 10% per month and at a...
Study smarter with the SolutionInn App