10. Which of the following is/are true about portfolio diversification? A. You can diversify away almost all of a portfolio's specific risk (or unsystematic risk) but can't get rid of systematic risk (or market risk). B. If you have a small portfolio, adding only a few stocks can lower overall portfolio risk (standard deviation) substantially. Adding a handful of stocks to a large portfolio (say, over 150 stocks) is likely to lower portfolio risk very little. C. Diversifying a portfolio can bring about benefits by reducing our portfolio's risk (i.e., standard deviation). However, whenever we lower the risk of a portfolio, this will always come at the cost of a lower expected return. D. The benefits of diversification are generated by adding assets to our portfolio which have lower standard deviations than the average asset in our portfolio. Since portfolio standard deviation is a weighted average of the standard deviations of the individual assets, this will always lower our portfolio risk. E. Both A and B are true. Both C and D true. G. Choices A-D are all true. 12. A bond with two years to maturity and a face value of $1000 makes semi-annual coupon payments, with a coupon rate of 7%. If the current bond price is $1017.60, what is the yield to maturity on the bond? (Note: if you do not have a financial calculator, you'll have to use trial and error. You may be able to eliminate some choices ahead of time, before starting Ea(culations.) A. 3.026% B. 6.039%N=2 C. 6.052% D. 6.486%FV=1000PMT=(R(FV) 5. Using many years' worth of data, you have estimated that the slope of the so-called "securities market line" is about .08. That is, you've found that if a portfolio's systematic risk increases by 1.0, its risk premium should increase by about 8%. Given this information, if the risk-free rate is 5%, what is the current expected return of the so-called "market portfolio?" 10. Which of the following is/are true about portfolio diversification? A. You can diversify away almost all of a portfolio's specific risk (or unsystematic risk) but can't get rid of systematic risk (or market risk). B. If you have a small portfolio, adding only a few stocks can lower overall portfolio risk (standard deviation) substantially. Adding a handful of stocks to a large portfolio (say, over 150 stocks) is likely to lower portfolio risk very little. C. Diversifying a portfolio can bring about benefits by reducing our portfolio's risk (i.e., standard deviation). However, whenever we lower the risk of a portfolio, this will always come at the cost of a lower expected return. D. The benefits of diversification are generated by adding assets to our portfolio which have lower standard deviations than the average asset in our portfolio. Since portfolio standard deviation is a weighted average of the standard deviations of the individual assets, this will always lower our portfolio risk. E. Both A and B are true. Both C and D true. G. Choices A-D are all true. 12. A bond with two years to maturity and a face value of $1000 makes semi-annual coupon payments, with a coupon rate of 7%. If the current bond price is $1017.60, what is the yield to maturity on the bond? (Note: if you do not have a financial calculator, you'll have to use trial and error. You may be able to eliminate some choices ahead of time, before starting Ea(culations.) A. 3.026% B. 6.039%N=2 C. 6.052% D. 6.486%FV=1000PMT=(R(FV) 5. Using many years' worth of data, you have estimated that the slope of the so-called "securities market line" is about .08. That is, you've found that if a portfolio's systematic risk increases by 1.0, its risk premium should increase by about 8%. Given this information, if the risk-free rate is 5%, what is the current expected return of the so-called "market portfolio