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Chapter 17: Q7. (page 369)

If an investment has 35 percent more non-diversifiable risk than the market portfolio, its beta will be:

  1. 35

  2. 1.35

  3. 0.35

Short Answer

Expert verified

The correct option is (b): 1.35

Step by step solution

01

Step 1. Explanation

The non-diversifiable risk of a market portfolio is calculated as beta. The beta compares the non-diversifiable risk of a portfolio with the market portfolio. The beta for the market portfolio is 1, and the non-diversifiable risk is 35% more than the market portfolio. Thus, the beta will be 1.35 (=1 + 0.35).

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Most popular questions from this chapter

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?

Consider another situation involving the SML. Suppose that the risk-free interest rate stays the same, but that investors鈥� dislike of risk grows more intense. Given this change, will average expected rates of return rise or fall? Next, compare what will happen to the rates of return on low-risk and high-risk investments. Which will have a larger increase in average expected rates of return, investments with high betas or investments with low betas? And will high-beta or low-beta investments show larger percentage changes in their prices?

Suppose that you invest $100 today in a risk-free investment and let the 4 percent annual interest rate compound. Rounded to full dollars, what will be the value of your investment 4 years from now?

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

Identify each of the following investments as either an economic investment or a financial investment.

a. A company builds a new factory.

b. A pension plan buys some Google stock.

c. A mining company sets up a new gold mine.

d. A woman buys a 100-year-old farmhouse in the countryside.

e. A man buys a newly built home in the city.

f. A company buys an old factory.
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