Question #6130

5. Which of the following statements is CORRECT?
a. If Mutual Fund A held equal amounts of 100 stocks, each of which had a beta of 1.0, and Mutual Fund B held equal amounts of 10 stocks with betas of 1.0, then the two mutual funds would both have betas of 1.0. Thus, they would be equally risky from an investor's standpoint, assuming the investor's only asset is one or the other of the mutual funds.
b. If investors become more risk averse but rRF does not change, then the required rate of return on high-beta stocks will rise and the required return on low-beta stocks will decline, but the required return on an average-risk stock will not change.
c. An investor who holds just one stock will generally be exposed to more risk than an investor who holds a portfolio of stocks, assuming the stocks are all equally risky. Since the holder of the 1-stock portfolio is exposed to more risk, he or she can expect to earn a higher rate of return to compensate for the greater risk.
d. There is no reason to think that the sl

Expert's answer

b. If investors become more risk averse but rRF does not change, then the required

rate of return on high-beta stocks will rise and the required return on low-beta

stocks will decline, but the required return on an average-risk stock will not

change.

rate of return on high-beta stocks will rise and the required return on low-beta

stocks will decline, but the required return on an average-risk stock will not

change.

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