Financial Management - Study Mode

[#216] Risk in average individual stock can be reduced by placing an individual stock in
Correct Answer

(B) diversified portfolio

Explanation

Solution: Risk in average individual stock can be reduced by placing an individual stock in diversified portfolio. A diversified investment is a portfolio of various assets that earns the highest return for the least risk. A typical diversified portfolio has a mixture of stocks, fixed income, and commodities.

[#217] Required return is 15% and premium for risk is 11% then risk free return would be
Correct Answer

(B) 4.00%

Explanation

Solution: Risk free return = Required return - Premium for risk = 15% - 11% = 4%.

[#218] Market required return is subtracted from risk free rate which is used to calculate
Correct Answer

(B) market risk premium

Explanation

Solution: Market required return is subtracted from risk free rate which is used to calculate market risk premium. The market risk premium is the difference between the expected return on a market portfolio and the risk-free rate. The market risk premium is equal to the slope of the security market line (SML), a graphical representation of the capital asset pricing model (CAPM).

[#219] In an option pricing, a rises in risk free rate results in option's value
Correct Answer

(B) slight increases

Explanation

Solution: In an option pricing, a rises in risk free rate results in option's value slightly increases. Option pricing is the amount per share at which an option is traded. Although the option holder is not obligated to exercise the option, the seller must buy or sell the underlying instrument if the option is exercised.

[#220] If current price increases from lower to higher then an
Correct Answer

(B) option value will increase

Explanation

Solution: If current price increases from lower to higher then an option value will increase. The current price, also known as the market value, is the price at which goods are currently being sold in the market.