Finance Exam 2

Portfolio risk will _______ if more stocks that are negatively correlated with other stocks are added to the portfolio decline
T/F: the portfolio’s risk is the weighted average of the individual stocks’ standard deviations false
T/F: the market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio false
T/F: portfolio risk is likely to be smaller than the average of all stocks’ standard deviations true
_______ reduces firm-specific risk in the portfolio diversification
__________ measures standalone risk standard deviation
__________ measures a stock’s contribution to the risk of the portfolio beta
_______ measures the risk of a given security relative to the market beta
in a non-diversified portfolio, __________ measures market/systematic risk beta
Beta(portfolio)= sum((investment/total) x beta)
required rate of return for a portfolio= r*+(MRP x Bp)
when investors become risk-averse, they require ________ compensation, which leads to a _________ slope and high risk premium more; steeper
if investors become less risk-averse, the slope of the SML will become flatter
a discount bond’s price is less than par value, but ______ over time until maturity rises
the riskiest of all corporate bonds, and therefore have the highest yield subordinated debentures

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