Chapter 11 Risk and Return
What is the Reward-to-Risk Ratio?
[E(RA) - Rf]/βA
The calculation of a portfolio beta is similar to the calculation of Blank______.
a portfolio's expected return
True or false: The calculation of the portfolio beta is similar to the calculation of the portfolio weights.
false
True or false: The expected return is the return that an investor expects to earn on a risky asset in the future.
true
By definition, what is the beta of the average asset equal to?
1
______ risk is reduced as more securities are added to the portfolio.
Company-specific Unsystematic Diversifiable
What is the equation for the capital asset pricing model?
Expected return on security = Risk-free rate + Beta × (Return on market − Risk-free rate)
What does the security market line depict?
It is a graphical depiction of the capital asset pricing model.
What is systematic risk?
It is a risk that pertains to a large number of assets.
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
It is likely to decrease. It may eventually be almost totally eliminated.
What is an uncertain or risky return?
It is the portion of return that depends on information that is currently unknown.
What is the definition of expected return?
It is the return that an investor expects to earn on a risky asset in the future.
As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?
It may eventually be almost totally eliminated. It is likely to decrease.
Which of the following statements is (are) true about variance?
Variance is a measure of the squared deviations of a security's return from its expected return. Standard deviation is the square root of variance.
If you wish to create a portfolio of stocks, what is the required minimum number of stocks?
You must invest in stocks of more than one corporation.
The appropriate discount rate to use to evaluate a new project is the Blank______.
cost of capital
The minimum required return on a new project is known as the Blank______.
cost of capital
The average ___ return on a portfolio is a combination of the expected returns on the assets in the portfolio.
expected
True or false: A well-diversified portfolio will eliminate all risks.
false
True or false: A well-diversified portfolio will eliminate all risks. True false question.
false
True or false: Expected return and inflation are the two components of risky return in the total return equation.
false
True or false: Portfolio weights can be defined as the dollars invested in each asset.
false
True or false: The expected return of a portfolio is a combination of the weights of each asset in a portfolio.
false
True or false: The standard deviation is the variance squared.
false
True or false: The surprise part of any announcement is the information the market uses to form the expectation of the return on the stock.
false
Which of the following are examples of a portfolio?
investing $100,000 in a combination of stocks and bonds investing $100,000 in a combination of U.S. and Asian stocks investing $100,000 in the stocks of 50 publicly traded corporations
An investment will have a negative NPV when its expected return is Blank______ what the financial markets offer for the same risk.
less than
Systematic risk is also called Blank______ risk.
market
What are the two components of risky return (U) in the total return equation?
market risk unsystematic risk
The security market line (SML) shows that the relationship between a security's expected return and its beta is Blank______.
positive
If an asset has a reward-to-risk ratio of 6.0%, that means it has a Blank______ of 6.0% per unit of Blank______.
risk premium; systematic risk
The Blank______ is the news that influences the unanticipated return on the stock.
surprise
Even if the portfolio is well diversified, the investor is still exposed to Blank______ risk.
systematic
______ risk is the only risk important to the well-diversified investor.
systematic
Which of the following types of risk is not reduced by diversification?
systematic, or market risk
Beta tells us the amount of Blank______ risk of an asset or portfolio relative to Blank______.
systematic; an average risky asset
The systematic risk principle argues that the market does not reward risks Blank______.
that are diversifiable that are borne unnecessarily
Which of the following are examples of information that may impact the risky return of a stock?
the Fed's decision on interest rates at their meeting next week the outcome of an application currently pending with the Food and Drug Administration
A portfolio can be described by its portfolio weights which are defined as Blank______.
the percentage of dollars invested in each asset
To determine the appropriate required return for an investment, we can use Blank______.
the security market line
The standard deviation is Blank______.
the square root of the variance
The standard deviation of a portfolio is Blank______.
the square root of the variance
True or false: It is possible for the unsystematic risk of a portfolio to be reduced almost to zero.
true
The true risk of any investment comes from Blank______.
unanticipated events surprises
What is the beta of the risk-free asset?
zero
