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Homework answers / question archive / 1)Which statements about the single index model (SIM) is/are not true? Select one or more: A
1)Which statements about the single index model (SIM) is/are not true? Select one or more: A. SIM is not an asset pricing model. B. SIM cannot simplify the estimation of the covariance matrix. C. SIM cannot identify the source of nonsystematic risk. D. SIM is not a one factor model. E. SIM cannot give an analytical solution to an optimal asset allocation problem.
2)Which statements about portfolio diversification is/are true? Select one or more: A. Proper diversification can eliminate nonsystematic risk. B. The lower the correlation, the greater the diversification effects, assuming no short-sales. C. The risk-reducing benefits of diversification do not occur meaningfully until at least 10 individual securities have been purchased. D. Because diversification reduces a portfolio's total risk, it necessarily reduces the portfolio's expected return. E. Typically, as more securities are added to a portfolio, the standard deviation would be expected to decrease at a decreasing rate.
1)
a. Wrong
The Single Index Model (SIM) is an asset pricing model, according to which the returns on a security can be represented as a linear relationship with any economic variable relevant to the security.
B Wrong
the index model greatly reduces the number of calculations required for calculating the covariance (σ2) of each stock that would otherwise have to be made for a large portfolio of thousands of securities.
C. True
SIM cannot specify the source, it tells the impact of that risk.
D.True
The single-index model assumes that there is only 1 macroeconomic factor that causes the systematic risk affecting all stock returns and this factor can be represented by the rate of return on a market index, such as the S&P 500.
E Wrong
This model can determine whether a stock entered into the optimal portfolio or not using a unique ranking criterion. Shares will be sorted by performance measured using an excess ratio return to risk, so that if a stock enters an optimal portfolio, then stocks with a higher ranking will also enter into the portfolio
2)
The first statement A) A PROPER DIVERSIFICATION CAN ELIMINATE THE NON SYSTEMATIC RISK IS TRUE.
Non systematic risk means risk related to an industry or a company which can be reduced by diversification. diversification means investing different securities from different industries and it reduces the overall nonsystematic risk.
The second statement b) the lower the correlation greater the diversification effects assuming no short selling is TRUE
The correlation between the different assets is lower then the risk of the portfolio is also lower and more benefits from diversification can be achieved.If the correlation is -1 which means most lower then more benefits can be achieved.
The last statement E) Typically as more securities are added to a portfolio the standard deviation decreases at decreasing rate is TRUE
If more securities are added to the portfolio the total risk will be decrease at a decreasing rate so the standard devation also measures the same element of risk, so will also get reduced in the same rate.
ALL OTHER STATEMENTS PROVIDED IN THE QUESTIONS ARE FALSE.
