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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

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.

Suppose that an SML indicates that assets with a beta = 1.15 should have an average expected rate of return of 12 percent per year. If a particular stock with a beta = 1.15 currently has an average expected rate of return of 15 percent, what should we expect to happen to its price?

  1. Rise.

  2. Fall.

  3. Stay the same.

What determines the vertical intercept of the Security Market Line (SML)? What determines its slope? And what will happen to an asset’s price if it initially plots onto a point above the SML?

If we compare the betas of various investment opportunities, why do the assets that have higher betas also have higher average expected rates of return?

Why is it so hard for actively managed funds to generate higher rates of return than passively managed index funds having similar levels of risk? Is there a simple way for an actively managed fund to increase its average expected rate of return?
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