\"If returns from a particular investment are \"\"bell-shaped\"\" then knowing t

Question

"If returns from a particular investment are ""bell-shaped"" then knowing the mean and variance of those returns will approximately describe their distribution" True False . 10 points

Question 2 We should expect firms with higher betas to have better returns True False . 10 points Question 3

The market factor should be linearly related to expected returns to diversified portfolios but not individual stocks True False . 10 points Question

4 A firm's beta is estimated by comparing returns to the market portfolio to returns of the stock True False . 10 points Question

5 If I find the minimum variance combination of two stocks, adding a third stock with a higher standard deviation that both the originial stocks will make the portfolio standard deviation increase True False . 10 points

Question 6 The security market line defines expected returns for diversified portfolios True False . 10 points

Question 7 If I buy equal amounts of a 1 beta stock and a 2 beta stock, my portfolio will have a 1.5 beta True False . 10 points

Question 8 A firm with a larger beta will always have a higher standard deviation of returns than a firm with a lower beta True False

Explanation / Answer

Solution.

1. "If returns from a particular investment are ""bell-shaped"" then knowing the mean and variance of those returns will approximately describe their distribution" :- This statement is True.

Although expected return is the best estimate available of future returns, the actual return is not likely to equal the expected return. For this reason, investors and managers would like to have an idea of how precise their estimate might be. To help quantify the precision of their estimates, you use two concepts: variance and its square root, the standard deviation.

2. We should expect firms with higher betas to have better returns :- This statement is False.

Beta measures a stock's volatility - the degree to which its price fluctuates in relation to the overall market. In other words, it gives a sense of the stock's market risk compared to the greater market. Beta is used also to compare a stock's market risk to that of other stocks. Investment analysts use the Greek letter 'ß' to represent beta.

This measure is calculated using regression analysis. A beta of 1 indicates that the security's price tends to move with the market. A beta greater than 1 indicates that the security's price tends to be more volatile than the market, and a beta less than 1 means it tends to be less volatile than the market. Many utility stocks have a beta of less than 1, and conversely, many high-tech Nasdaq-listed stocks have a beta greater than 1.

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