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Principles of Finance

Review Questions

Principles of FinanceReview Questions
1 .
What is the difference between firm-specific risk and unsystematic risk?
2 .
Explain why diversification reduces unsystematic risk but not systematic risk.
3 .
Explain what happens to the standard deviation of returns of a portfolio as the number of stocks in the portfolio increases.
4 .
Enrique owns five stocks: Alaska Airlines, American Airlines, Delta Airlines, Southwest Airlines, and Ford. Radha also owns five stocks: Apple, McDonald’s, Tesla, Facebook, and Disney. Does Enrique or Radha have a more diversified portfolio?
5 .
You are considering purchasing shares in a company that has a beta of 0.8. Explain what this beta means.
6 .
Explain how the Sharpe ratio and the Treynor ratio can be considered reward-to-risk measures.
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