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    TF Risk and Return: expected rate of return, market risk, underpriced, volatile,

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    True or False? Explain or qualify answer 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 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.

    Please show all work and explain.

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    Solution Preview

    True or False? Explain or qualify answer as necessary.

    a) The expected rate of return on an investment with a bet of 2 is twice as high as the expected rate of return of the market portfolio.
    False.
    Rp =Rf+Beta*(Rm-Rf)
    When Beta is 2 we have Rp =Rf+2*(Rm-Rf)=2*Rm-Rf

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

    Solution Summary

    In a sentence or two, the responses are explained including calculations as needed.

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