T/F The variance of an asset's return can be less than the standard deviation of that asset's
Question:
T/F
The variance of an asset's return can be less than the standard deviation of that asset's return.
If an investor owns two stocks, one whose standard deviation is 0.21 and the other whose standard deviation is 0.10, the required return will be higher for the stock with the higher standard deviation.
Different investors have different degrees of risk aversion, and the result is that investors with greater risk aversion tend to hold securities with lower risk (and therefore a lower expected return) than investors who have more tolerance for risk.
A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.
A stock's beta is more relevant as a measure of risk to an investor who holds a well-diversified portfolio.
Portfolio A has one security, while Portfolio B has 100 securities. Portfolio A can be less risky.
Portfolio A has only one stock, while Portfolio B consists of all stocks that trade in the market, each held in proportion to its market value. Because of its diversification, Portfolio B will by definition be riskless.
A portfolio's risk is measured by the weighted average of the standard deviations of the securities in the portfolio.
Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.
Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and in theory, their effects on investment risk cannot be diversified away.?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill