The cash generated from reducing inventories will be used to buy tax-exempt securities which have a 7 percent rate of return. The Merriam Company has determined that its return on equity is 15 percent. Management is interested in the various components that went into this calculation. When adding new securities to an existing portfolio, the higher or more positive the degree of correlation between the new securities and those already in the portfolio, the greater the benefits of the additional portfolio diversification. True, b. False 13 .
Market risk refers to the tendency of a stock to move with the general stock market.
A stock with above-average market risk will tend to be more volatile than an average stock, and it will definitely have a beta which is greater than 1.0. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the company specific risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all market risk. True, b. False 16 . The market risk premium would increase. Beta would increase.