Whether the given statements are true or false.

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Chapter 7, Problem 14PS

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To discuss: Whether the given statements are true or false.

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Diversification works because: Select one: a. Portfolios have higher returns than individual assets. O b. Firm-specific risk can be never be reduced. O c. Stocks earn higher returns than bonds. O d. Unsystematic risk exists. O e. Forming stocks into portfolios reduces the standard deviation of returns for each stock.

Indicate whether the following statements are true or false. a. Investors prefer diversified companies because they are less risky. multiple choice 1 True False b. If stocks were perfectly positively correlated, diversification would not reduce risk. multiple choice 2 True False c. Diversification over a large number of assets completely eliminates risk. multiple choice 3 True False d. Diversification works only when assets are uncorrelated. multiple choice 4 True False e. Diversification reduces the portfolio beta. multiple choice 5 True False f. A portfolio of stocks, each with a beta of 1.0, will have a beta of less than 1.0 unless the returns are perfectly correlated. multiple choice 6 True False g. A stock with a low standard deviation always contributes less to portfolio risk than a stock with a higher standard deviation. multiple choice 7 True…

d. Diversification works only when assets are uncorrelated. multiple choice 4 True False e. Diversification reduces the portfolio beta. multiple choice 5 True False f. A portfolio of stocks, each with a beta of 1.0, will have a beta of less than 1.0 unless the returns are perfectly correlated. multiple choice 6 True False