BUS 401 WEEK 3 ASSIGNMENT WITH ALL THE ANSWERS 100% CORRECT (ADAPTIVE ACTIVITY).

Which portfolio has the highest systemic risk? THE CORRECT ANSWER 50% invested in a stock with beta = 1.0 50% invested in a stock with beta = 2.0 WHAT YOU NEED TO KNOW Portfolio beta measures the portfolio’s sensitivity to systematic risk (market risk). When used with stocks, beta is a multiplier for expected volatility. A stock with a beta of 2 is expected to have twice the volatility of the market, while and a stock with a beta of 0.5 is expected to have half the volatility of the market. Portfolio betas are found by taking the weighted average of the betas of the assets held in the portfolio, where the weights are determined by the amount invested in each asset. The portfolios have the following betas: (50% x 1.0) + (50% x 2.0) = 1.5 (50% x 1.2) + (50% x 0.8) = 1.0 (50% x 1.0) + (50% x 0.6) = 0.8 The first portfolio has the highest beta. What is the best determination of business risk? THE CORRECT ANSWER Variability of EBIT WHAT YOU NEED TO KNOW Business risk is the possibility that a company will have lower-than-anticipated operating income. The most common definition of business risk is the variability of earnings before interest and taxes (EBIT). Financial risk is the risk that a company will fail to meet its debt obligations. A company can have high business risk but low financial risk, and vice versa. One way to measure financial risk is the leverage ratio (LEV): The higher the leverage ratio, the higher the financial risk. Moody’s metric for asset coverage measures how many tangible assets the firm has as collateral against its debt in the event of bankruptcy: