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Chapter 17: Q5. (page 369)

Sammy buys stock in a suntan-lotion maker and also stock in an umbrella maker. One stock does well when the weather is good; the other does well when the weather is bad. Sammy鈥檚 portfolio indicates that 鈥渨eather risk鈥� is a _______ risk.

  1. diversifiable

  2. nondiversifiable

  3. automatic

Short Answer

Expert verified

The correct option is (a): diversifiable

Step by step solution

01

Step 1. Explanation

Sammy buys two stock where one performs well in good weather and one perform in bad weather. If Sammy invests all his money in one stock, the return will be low when the stock is not performing. If Sammy invests all his money in two different stocks, if one is not performing and one is performing, the return will be more than investing all money in one. Thus, Sammy is diversifying risk.

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Most popular questions from this chapter

Suppose that the city of New York issues bonds to raise money to pay for a new tunnel linking New Jersey and Manhattan. An investor named Susan buys one of the bonds on the same day that the city of New York pays a contractor for completing the first stage of construction. Is Susan making an economic or a financial investment? What about the city of New York?

If the Fed increases interest rates, the SML will shift _______ and asset prices will _______.

  1. down; rise

  2. down; fall

  3. up; rise

  4. up; fall

Consider an asset that costs \(120 today. You are going to hold it for 1 year and then sell it. Suppose that there is a 25 percent chance that it will be worth \)100 in a year, a 25 percent chance that it will be worth \(115 in a year, and a 50 percent chance that it will be worth \)140 in a year. What is its average expected rate of return? Next, figure out what the investment鈥檚 average expected rate of return would be if its current price were $130 today. Does the increase in the current price increase or decrease the asset鈥檚 average expected rate of return? At what price would the asset have a zero average expected rate of return?

The U.S. government issues longer-term bonds with horizons of up to 30 years. Why do 20-year bonds issued by the U.S. government have lower rates of return than 20-year bonds issued by corporations? And which do you think has the higher rate of return, longer-term U.S. government bonds or short-term U.S. government bonds? Explain.

Tammy can buy an asset this year for \(1,000. She is expecting to sell it next year for \)1,050. What is the asset鈥檚 anticipated percentage rate of return?

  1. 0 percent

  2. 5 percent

  3. 10 percent

  4. 15 percent
See all solutions

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