Assume that the assumptions underlying the standard CAPM hold. Indicate whether

Question

Assume that the assumptions underlying the standard CAPM hold. Indicate whether each of the following statements is True or False

    a. A firm with a high variance will have a higher beta than a firm with a low variance.

     b. A portfolio is efficient if it has no unsystematic risk.

     c. A firm that is highly correlated with the market will have a higher beta than a firm that is less  

        correlated.

     d. If the variance of the market portfolio goes up, the betas of all securities will go down.

Explanation / Answer

A) True a firm with higher variance will always have a higher beta as compared to the firm with lower variance

B) A portfolio is efficent if it has no systematic risk because unsystematic risk is out of control of the investor and it is uncertain

C) A firm that is highly correlate to the market will have a higher beta as compared to the firm that is less correlated

D_) False Beta and variance are directly proportion and variance of portfolio goes up this does not mean that the beta of all securities will go down

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