# Risk and Return Problems

Please help with the following problems.

Risk and Return. True or false? Explain or qualify as necessary.

a. The expected rate of return on an investment with a beta of 2 is twice as high as the expected

rate of return of the market portfolio.

b. The contribution of a stock to the risk of a diversiﬁed portfolio depends on the market risk

of the stock.

c. If a stock's expected rate of return plots below the security market line, it is underpriced.

d. A diversiﬁed portfolio with a beta of 2 is twice as volatile as the market portfolio.

e. An undiversiﬁed portfolio with a beta of 2 is twice as volatile as the market portfolio.

https://brainmass.com/business/finance/risk-return-problems-23819

#### Solution Preview

a) False. Consider the CAPM formulae Expected Return = Risk Free Rate + Beta * Market Premium. If you use a beta of 2, no doubt you get twice the market premium, but what about the risk free rate? In the mid 1990's the risk free rate was as high as 9%, so you will not get double the ...

#### Solution Summary

This solution helps with true and false problems involving risk and return.