Question
1A) Risk-averse investors who hold a single stock would require a higher rate of return on a stock whose standard deviation is 0.33 than on
1A) Risk-averse investors who hold a single stock would require a higher rate of return on a stock whose standard deviation is 0.33 than on a stock whose standard deviation is 0.18. But, if these stocks are held as part of a portfolio, it is possible for the stock with the higher standard deviation to have the lower required return. True/False?
1B) Ceteris paribus, a change in the beta of a firm's stock will change the required rate of return on that stock, as well as the stock's price. True/False?
1C) The distributions of rates of return for companies Alpha and Beta are as follows:
State of the Probability of
Economy This State Occurring Alpha Beta
Boom 0.2 30% -10%
Normal 0.6 10% 5%
Recession 0.2 -5% 50%
Given the numbers above, we can conclude that a risk-averse investor would be better off adding company Beta to a well-diversified portfolio over company Alpha. True/False?
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