Use the information for the question(s)below. Suppose that you currently have $250,000 invested in a portfolio with an expected return of 12% and a volatility of 10%.The efficient (tangent)portfolio has an expected return of 17% and a volatility of 12%.The risk-free rate of interest is 5%. -Which of the following statements is FALSE? A)Because all other risk is diversifiable,it is an investment's beta with respect to the efficient portfolio that measures its sensitivity to systematic risk,and therefore determines its cost of capital. B)If a security's expected return exceeds its required return given our current portfolio,then we can improve the performance of our portfolio by adding more of the security. C)The appropriate risk premium for an investment can be determined from its beta with the efficient portfolio. D)As we buy shares of a security i,its correlation with our portfolio P will increase,ultimately raising its required return until E[R_i] = R_p.

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Quizplus · Accepted Answer

As we buy shares of a security, its correlation with our portfolio will increase, thus causing its required return to increase until it reaches the point where its expected return is equal to the portfolio's expected return. However, the formula given in option D is incorrect, making it the false statement. Therefore, D is the correct answer. Option A, B, and C are all correct statements.

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