1.If a stock's return has a large standard deviation, that suggests the stock has little risk is tru or false.
2.If the return on two stocks is highly and positively correlated(i.e., correlation coefficient=+1.0), combining these stoocks will reduce the risk associated with the portfolio is true or false.
If a stock is bought on margin
a. Part of the cost of investment is borrowed
b. the commissions on the investment are increased
c. The cost of the investment is reduce
d. the interest on the borrowed funds is set by the SEC.
1. False.
The statement is false. A large standard deviation indicates that the returns of the stock are more volatile and unpredictable, which suggests higher risk. Standard deviation is a measure of the dispersion of returns around the mean. The higher the standard deviation, the greater the potential variability in returns, and therefore, the higher the risk.
To determine if a stock has little risk, you need to consider factors such as the stock's beta, the company's financial health, the industry it operates in, and other fundamental and technical indicators.
2. False.
The statement is false. If the return on two stocks is highly and positively correlated (correlation coefficient = +1.0), combining these stocks will not reduce the risk associated with the portfolio. Correlation measures the strength and direction of the relationship between two variables. A correlation coefficient of +1.0 indicates a perfect positive correlation, meaning that the two stocks move in lockstep with each other. When combining highly correlated stocks in a portfolio, the risk is not diversifiable, and the overall risk of the portfolio remains the same.
To reduce the risk associated with a portfolio, you would typically aim for diversification by including stocks with lower or negative correlations to each other.
Regarding the question about buying stock on margin, the correct answer is:
a. Part of the cost of investment is borrowed.
When buying stock on margin, an investor borrows funds from a broker to purchase the stock. This allows the investor to leverage their investment, potentially amplifying both gains and losses. The borrowed funds form a portion of the total investment cost, and the investor is responsible for paying back the borrowed amount, plus interest, over time.