Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects. b. well-diversified stockholders do not need to consider market risk when determining required rates of return. c. one advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities. d. simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions. e. market risk is important, but it does not have a direct effect on stock prices because it only affects beta.

Stocks a, b, and c are similar in some respects: each has an expected return of 10% and a standard deviation of 25%. stocks a and b have returns that are independent of one another; i.e., their correlation coefficient, r, equals zero. stocks a and c have returns that are negatively correlated with one another; i.e., r is less than 0. portfolio ab is a portfolio with half of its money invested in stock a and half in stock b. portfolio ac is a portfolio with half of its money invested in stock a and half invested in stock c. which of the following statements is correct? a. portfolio ab has a standard deviation that is greater than 25%.b. portfolio ac has an expected return that is less than 10%.c. portfolio ac has a standard deviation that is less than 25%.d. portfolio ab has a standard deviation that is equal to 25%.e. portfolio ac has an expected return that is greater than 25%.