FIN-315 Ch. 8 Risk and Return

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Coefficient of variation

A ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns

Standard deviation

A ________ measures the dispersion around the expected value

has the same response as the market portfolio

A beta coefficient of +1 represents an asset that

has the same response as the market portfolio but in opposite direction

A beta coefficient of -1 represents an asset that

is unrelated to the market portfolio

A beta coefficient of 0 represents an asset that

Risk

A measure of the uncertainty surrounding the return than an investment will earn

Efficient Portfolio

A portfolio that maximizes return for a given level of risk

Efficient

A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return

collection of assets with the aim of maximizing the return

An efficient portfolio is defined as

maximizes return for a given level of risk

An efficient portfolio is one that

cause an increase in the beta and would increase the required return

An increase in nondiversifiable risk would

investors' required rate of return will increase

As risk aversion increases

Risk-neutral

If a manager prefers a higher return investment regardless of its risk, then he is following a

Risk-seeking

If a manager prefers investments with greater risk even if they have lower expected returns, then he is following a ________ strategy

Risk-averse

If a manager requires greater return when risk increases, then he is said to be

Parallel shift upward in the security market line

In the capital asset pricing model, an increase in inflationary exceptions will be reflected by a?

Market Risk

In the capital asset pricing model, the beta coefficient is a measure of

Nondiversifiable risk

In the capital asset pricing model, the beta coefficient is a measure of

the slope of the security market line

In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by

Beta Coefficient

Is a relative measure of nondiversifiable risk

Systematic risk

Relevant portion of an asset's risk attributable to market factors that affect all firms is called

an increase in return, for a given increase in risk

Risk aversion is the behavior exhibited by managers who require

Nondiversifiable risk

Risk that affects all firms is called

U.S. Treasury bills (T-bills)

Short-term IOUs issued by the U.S. Treasury, considered the risk-free asset

Diversifiable risk

Strikes, lawsuits, regulatory actions, or the loss of a key account are all examples of

Nondiversifiable risk

Systematic risk is also referred to as

risk-free rate and risk premium

The CAPM can be divided into

Lower, Lower

The ________ the coefficient of variation, the ________ the risk.

Capital Asset Pricing Model (CAPM)

The basic theory that links risk and return for all assets

is equal to 0

The beta associated with a risk-free asset is

is the weighted average of the betas of the individual assets in the portfolio

The beta of a portfolio

minimize risk for a given level of return

The goal of an efficient portfolio is to

the more responsive it is to changing market returns

The higher an asset's beta

Unsystematic risk

The portion of an asset's risk that is attributable to firm-specific, random causes is called

Risk-Free Rate of Return

The required return on a risk-free asset, typically a 3-month U.S. Treasury bill

dividing the asset's cash distributions during the period, plus change in value, by its beginning-of period investment value

The total rate of return on an investment over a given period of time is calculated by

can be eliminated through diversification

Unsystematic risk

Nondiversifiable risk

War, inflation, and the condition of the foreign markets are all examples of

Changes in risk aversion, and therefore shifts in the SML, result from changing preferences of investors.

Which of the following is true of risk aversion?

Diversifiable

risk represents the portion of an asset's risk that can be eliminated by combining assets with less than perfect positive correlation


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