Meme a firm specific risk event? 14. Which of the follow ing provides the best e
ID: 2783213 • Letter: M
Question
Meme a firm specific risk event? 14. Which of the follow ing provides the best example of A. Glohal warming B. Mad Cow discase in Montana burts local ranchers and buyers of beef C. The Federal Reserve increases interest rates 50 basis points. D. A senior evecutive at a firm embezzles $10 milion and escapes to 15. You invest $1,000 in a complete portfolio. The complete portfolio is asset with an expected rate of return of 20% and a standard deviation of 15% and a Treasury bill with a rate of return of 6%The Sharpe ratio of your complet composed of a risky e portfolio is approximately A. 1.05 B. .93 C. .50 D. 34 16" The risk-free rate is 5%. A risky portfolio has an expected return of 10% and deviation of return of 20%. If you want to form a complete prtfolio from these you want this portfolio to have an expected return greater than 5% but less than 10% what must you do? Assume that all borrowing and lending can be donc at the risk free rate A. lend at the risk free rate B. borrow at the risk free rate. a standard two assets, and C. short sell the risky portfolio. D. There is no way to achieve an expected return greater than 5% but less than 10%Explanation / Answer
14.
A firmspecific risk is typr of risk which is associated with the firm only. this type ofrisk can be minimized or eliminate by diversification. Stanadard deviation is a measure of firm specific risk. An exampleof firm specific risk is a senior manager of the firm embezzles $10millionand escape to south affrica.
Option (D) is correct answer.
15.
Sharpe ratio is calculated by using following formula:
Sharpe ratio = (Portfolio return - risk free rate) / Standard deviation
= (20% - 6%) / 15%
= 14% / 15%
= 0.93
Sharpe ratio of comapny is 0.93.
Option (B) is correct answer.
16.
Risk free return is 5% and stock return is 10%. SO if you construct portfolio with these two securities, then expected return must be between 5% and 10%. so to do this you have to lend money at or invest monet at risk free rate.
Option (A) is correct answer.