Determine correct statement concerning risk premium

Reference no: EM1350847

1. Which one of the following is a correct statement concerning risk premium?

The greater the volatility of returns, the greater the risk premium.
The lower the volatility of returns, the greater the risk premium.
The lower the average rate of return, the greater the risk premium.
The risk premium is not correlated to the average rate of return.
The risk premium is not affected by the volatility of returns.

2. Which of the following statements are correct concerning the variance of the annual returns on an investment?

(I) The larger the variance, the more the actual returns tend to differ from the average return.
(II) The larger the variance, the larger the standard deviation.
(III) The larger the variance, the greater the risk of the investment.
(IV) The larger the variance, the higher the expected return.

Which one is right?
I and III only
II, III, and IV only
I, III, and IV only
I, II, and III only
I, II, III, and IV

3. The standard deviation of a portfolio will tend to increase when:
a). a risky asset in the portfolio is replaced with U.S. Treasury bills.
b). one of two stocks related to the airline industry is replaced with a third stock that is unrelated to the airline industry.
c). the portfolio concentration in a single cyclical industry increases.
d) the weights of the various diverse securities become more evenly distributed.
e) short-term bonds are replaced with long-term bonds.

Reference no: EM1350847

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