One of the Easiest Methods of Diversifying Away Firm-Specific Risks

question 12

Multiple Choice

One of the easiest methods of diversifying away firm-specific risks is to:

• A)buy stocks with a Beta of 1.0.
• B)build a portfolio with 20-25 individual stocks.
• C)purchase the shares of a mutual fund.
• D)purchase stocks that plot above the security market line.

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Definitions:

D1

Often used in dividend discount models, it represents the expected dividend per share for the next year.

Dividend Per Share

The amount of dividend that a company pays out to its shareholders for each share they own.

Return on Equity

An indicator of a company's financial performance, showing the amount of profit generated per dollar of shareholders' investment.

Required Return

The minimum expected return an investor demands for investment in a specific asset, considering its risk profile.