Fin 357 Final chapter 13

Examples of portfolio

- Investing $100,000 in the stocks of 50 publicly traded corporations -Investing $100,000 in a combination of U.S. and Asian stocks -Holding $100,000 investment in a combination of stocks and bonds

what is the beta of the average asset equal to?

1

We measure systematic risk with

Beta

Under what conditions will a company's announcement of good (or bad) new have no effect on the company stock price

If the market already priced it in; that is, if the new was expected

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model. It shows the relationship between expected return and beta.

If a security's expected return is equal to the risk-free rate of return, and the market-risk premium is greater than zero, what can you conclude about the value of the security's beta based on CAPM?

It is equal to 0.

Why is some risk diversifiable? Why is some risk not diversifiable?

Some risk is specific to certain firms and can be diversified away; other risk relates to the market in total and therefore can not be diversified away

what is the systematic risk principle

The expected return on a risky asset depends only on that assets systematic risk

According to the capital asset pricing model (CAPM), what is the expected return on a security with a beta of zero?

The risk-free rate of return

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.

Why can't systematic risk be diversified away?

all stocks are part of the system

The beta

coefficient is the amount of systematic risk present in a particular risky asset relative to that in an average asset.

The minimum required return on a new project when its risk is similar to that of projects the firm currently owns is known as the

cost of capital

Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio

declines

The standard deviation of a portfolio is ______ the weighted average of the standard deviations of the assets in the portfolio.

less than or equal to

The percentage of a portfolio's total value that is invested in a particular asset is the

portfolio weight

The security market line (SML) shows that the relationship between a security's expected return and its beta is

positive (the higher the beta, the higher the expected return.)

The SML is very important because it tells us the "going rate" for bearing

risk in the economy

what is the principle of diversification

spreading an investment across a number of assets will eliminate some, but not all, of the risk

We measure total risk with

standard deviation = beta + unsystematic risk

The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is

systematic

what are the two basic types of risk?

systematic (aka market) and unsystematic ( firm-specific)

The systematic risk principle argues that the market does not reward risks

that are borne unnecessarily

To determine whether an investment has a positive NPV, you can compare the expected return on that new investment to what the financial market offers on an investment with

the same beta

the risk-free asset has a beta of

zero