chapter 13 finance final

systematic risk is measured by

beta

if we hold only one asset or assets in the same undistry

then we are exposing ourselves to risk that we could diversify away

can we define the relationship between premium and beta so that we can estimate the expected return

yes

11. Which of the following statements concerning risk are correct? I. Non-diversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for non-diversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.

I and III only

portfolio is

a collection of assets

which one of the following statements is correct concerning a portfolio beta

a portfolio beta is a weighted average of the betas of the individual securities contained in the portfolio

market equilibrium

all assets and portfolios must have the same reward to risk ratio and they all must equal the reward to risk ratio for the market

this reduction in risk

arises because worst than expected returns from one asset are offset by better than expected returns from another, however there is a minimum level of risk that cannot be diversified away and that is the systematic portion

expected means

average if the process is repeated many times

the systematic risk of the market is measured by

beta of 1

unsystematic risk

can be effectively eliminated by portfolio diversification

the standard deivation of a portfolio

can be less than the standard deviation of the least risky security in the portfolio

CAPM capital asset pricing model

defines the relationship between risk and return, if we know an assts systematic risk we can use the capm to determine its expected return , this is true whether we are talking about financial assets or physicial assets

expected return does not

even have to be a possible return

You own a stock that you think will produce a return of 11 percent in a good economy and 3 percent in a poor economy. Given the probabilities of each state of the economy occurring, you anticipate that your stock will earn 6.5 percent next year. Which one of the following terms applies to this 6.5 percent?

expected return

an asset risk and return are important

in how they affect the risk and return of the portfolio

the standard deviation of returns

is a measure of total risk , for well diversified portfolios unsystematic risk is very small, consequently the total risk for a diversified portfolio is essiecially equivalent to the systematic risk

portfolio diversitication

is the investment in several different asset classes or sectors

SML security market line

is the representation of marke equilibrium

assume the market rate of return is 10.1 percent and the risk free rate of return is 3.2. lexant stock has 2 percent less systematic risk than the market and has an actual return of 10.2 this stocl

is underpriced

diversification is not

just holding a lot of assets for example if you own 50 internet stocks you are not diversified but if yo own 50 stocks in 20 different industries you are diversified

which one of tehe following is represented by the slope of the security market line

market risk premium

the expected rate of return on a stock portfolio is a weighted average where the weights are based on the

market value of the investment

variance and standard deviation

measure the volatility of returns

amount of systematic risk

measured by beta

reward for being systematic risk

measured by the market risk premium

the risk return trade off for a portfolio is

measured by the portfolio expected return and standard deviation just as with individual assets

pure time value of money

measured by the risk free rate

which of the following is an example of unsystematic risk

national decrease in consumer spending on entertainment

systematic risk is also known as

non diversifiable risk or market risk, this inclused things such as changes in GDP, inflation, interest rates

suzie owns five different bonds and twelve different stocks. which one of the following terms most applies to her investments

portfolio

which of the following will be constant for all securities if the market is efficient and securities are priced fairly

reward to risk ratio

systematic risk

risk factors that affect a large number of assets

unsystematic risk

risk factors that affect a limited number of assets, also known as a unique risk and asset specific risk , includes things such as labor strikes, part shortages

the excess return earned by an asset that has a beta of 1.34 over that earned by a risk free asset is referred to as the

risk premium

which of the following is a positively sloped linear function that is created when expected returns are graphed against security betas

security market line

the principal of diversification tells us that

spreading an investment across many diverse assets will eliminate some of the total risk

which of the following should earn the highest risk premium based on CAPM

stock with beta of 1.38

diversification can

substaintially reduce the variability of returns without an equivalent reduction in expected returns

the market risk premium is computed by

subtracting the risk free rate of return form the market rate of return

which one of the following is a risk that applies to most ssecurities

systematic

total risk =

systematic risk + unsystematic risk

the higher the beta

the greater the risk premium should be

you can also find the expected return by finding

the portfolio return in each possible state and computing the expected value as we did with individual securities

expected returns are based on

the probabilities of possible outcomes

the intercept point of the security market line is the rate of return which corresponds to

the risk free rate

diversifiable risk

the risk that can be elimiated by combining assets into a portfolio, often considered the same as unsystematic unique or asset specific

which of the following statements related to risk is correct

the systematic risk of a portfolio can be effectively lowered by adding t-bills to the portfolio

systematic risk principal

there is a reward for bearing risk there is not a reward for bearing risk unnecessarily, the expected return on a risky asset depends only on that assets systematic risk since undystematic risk can be diversified away

standard deviation measures which type of risk

total

which one of the following risks is irrelevant to a well diversified investor

unsystematic risk

how do we measure systematic risk

we use the beta coefficient

the expected return of a portfolio is the

weighted average of the expected returns of the respective assets in the portfolio

what does beta tell us

• A beta of 1 implies the asset has the same systematic risk as the overall market • A beta < 1 implies the asset has less systematic risk than the overall market • A beta > 1 implies the asset has more systematic risk than the overall market