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Can we have high-beta stocks that might be attractive from a risk perspective and low-beta stocks that are unattractive? Explain.

In broad terms, why is some risk diversifiable? Why are some risks non diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?

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Casey Durgan
Casey DurganLv2
29 Sep 2019

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Q2: You own a portfolio that has $700 invested in Stock A and $2,400 invested in Stock B. If the expected returns on these stocks are 11 percent and 18 percent, respectively. 
 
Required:  
 
a) What is the expected return on the portfolio?
b) Why is some risk diversifiable? Why are some risks non-diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk? 
c) Can the risk of a portfolio be reduced to zero by increasing the number of stocks in the portfolio? Explain.
d) If investors’ aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.

CAPM argues that individual securities are exposed to two types of risks: 1) Corporate risks that can be diversified and 2) Market risks that cannot be diversified. So, no matter how much we diversify, we cannot diversify away the market risk. CAPM-Beta is then defined as the correlation of a security to the overall market portfolio. Please provide three (3) market events that cannot be diversified away. Hint: Your security domain should not be limited to stocks. For instance, one can easily diversify inflation risk by investing in Treasury inflation protected securities. Market risk should be non-diversifiable.

QUESTION 5

Today is your 25th birthday, and you want to save $1.5 Million by your birthday at age 70. If you expect to earn 7% APR compounded monthly in your retirement account, what constant payment at the end of each month must you deposit into the account through your 70th birthday in order to reach your retirement savings goal on your 70th birthday? (Answer to the nearest penny.)

QUESTION 46

Suppose you are comparing two portfolios of stocks to determine which is more appropriate for all of your investments. Portfolio A contains a large number of stocks, but each stock appears to have a relatively high amount of risk which you believe is unsystematic in nature and a relatively low level of systematic risk. Portfolio B also contains a large number of stocks, however each stock in that portfolio seems to contain a relatively large amount of systematic risk and a low level of unsystematic risk. If both portfolios have the same expected return, which portfolio would most likely be the best choice?

a.

Portfolio A
b.

Portfolio B
c.

There is no information that would indicate that one portfolio is better than the other.

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