Answer the questions below, if a calculation is needed please provide your solut

Question

Answer the questions below, if a calculation is needed please provide your solutions:

1.Risk which affect all companies, but to varying degrees are a)diversifiable b)non diversifiable c)total risk d)part a and part b

2. Possible bankruptcy of Pear Fruit Company because of law suits is an example of a)systematic b)non systematic c)total risk d)part a and part b

3. The observation that during a bear market more firms go bankrupt than during a bull market shows default risk is a)systematic b)non systematic c) part a and part b

4. Inflation is considered a)systematic b)non systematic c)total risk  

----> The next three questions are about the Capital Asset Pricing Model Security Market Line equation: E(Rj) = Rf + [E(Rm - Rf] betaj

5.The expected return for stock estimated using the capital asset pricing model is the minimum return an investor should receive for

a) non diversifiable or systematic risk
b) diversifiable or unsystematic risk
c) purchasing power risk
d) total risk

6. [E(Rm - Rf] is the a) premium for systematic risk b) premium for unsystematic risk c) amount of systematic risk d) amount of unsystematic risk

7. Betaj company J’s a) premium for systematic risk b) premium for unsystematic risk c) amount of systematic risk d) amount of unsystematic risk

8.The risk-free return is 8% and the market return is 12%. If the company’s beta is 2 the company’s return is expected to be a)16% b)32% c)40% d)8%

9.A company whose price rises twice as fast as the market and falls twice as fast as the market has a beta of a).5 b)2 c)4 d)6

11. Total risk of a stock is measured by the stock’s a)beta b)correlation c)standard deviation d)return

12. The percent of systematic risk in the total risk is measured by a)beta b)correlation c)standard deviation d)correlation squared

Explanation / Answer

1 Such risk is called systematic risk, this risk will not be reduced due to diversifiation and hence called Undiversifiable risk. (b) 2 Law suit of firm is a specific risk of the company therefore it can be mitigated by investing in other companies therefore it is unsystematic and hence diversifiable (b) 3 Market risk is systematic as no company can avoid such risk, such type of risk cannot be mitigated but can be hedged only. It is captured by Beta. (a) 4 Inflation affects the while market and it is unavoidable hence systematic risk (a) 5 CAPM captures Beta. And beta repressents the change in stock returns due to change in market i.e. systematic risk. (a) 6 Rm- Rf is the premium for beta i.e. systematic risk (a) 7 beta represents systematic risk amount © 8 Re = Rf + (rm-Rf) x Beta = 8 + (12-8) x 2 = 16% 9 As I have explained in earlier answer beta shower relationship with market here every one change in market changes the stock with market in the same direction , beta is 2 (b) 11 Total risk is measured by standard deviation ( C) 12 It is represented by corelation square. Systematic risk = r^2 x Variance Here variance is total risk and % applied is r^2 (d) Please provide feedback…. Thanks in advance…. :-)

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