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4. Which of the following statements is CORRECT?...

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4. Which of the following statements is CORRECT? a. When diversifiable risk has been diversified away, the inherent risk that remains is market risk, which is constant for all stocks in the market. b. Portfolio diversification reduces the variability of returns on an individual stock. c. Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihoods of unfavorable events. d. The SML relates a stock's required return to its market risk. The slope and intercept of this line cannot be controlled by the firms' managers, but managers can influence their firms' positions on the line by such actions as changing the firm's capital structure or the type of assets it employs. e. A stock with a beta of -1.0 has zero market risk if held in a 1-stock portfolio. 5. Which of the following statements is CORRECT? a. If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds. b. If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change. c. An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk. d. There is no reason to think that the slope of the yield curve would have any effect on the slope of the SML. e. Assume that the required rate of return on the market, rM, is given and fixed at 10%. If the yield curve were upward sloping, then the Security Market Line (SML) would have a steeper slope if 1-year Treasury securities were used as the risk-free rate than if 30-year Treasury bonds were used for rRF 6. Which of the following statements is CORRECT? a. A major disadvantage of financing with preferred stock is that preferred stockholders typically have supernormal voting rights. b. Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm?s common stock, and, as a result, the expected after-tax yield on the preferred is lower than the after-tax expected return on the common stock. Preferred stock concepts c. The preemptive right is a provision in all corporate charters that gives preferred stockholders the right to purchase (on a pro rata basis) new issues of preferred stock. e. One of the advantages to financing with preferred stock is that 70% of the dividends paid out are tax deductible to the issuer.,I answer the question but I am not sure about it after you check it could you explain to me why the answer is correct? Thanks,for # 4 the answer d, # 5 the answer is e and # 6 the answer is b I think those answer are correct just I want to find out what is the reason. Thank you

 

Paper#3802 | Written in 18-Jul-2015

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