FIN 320 SB chapter 11
When a dollar in the future is discounted to the present it is worth less because of the time value of money, but when a news item is discounted, it means that the market:
already knew about most of the news item
Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio:
declines
True or false: Expected return and inflation are the two components of risky return in the total return equation
false
True or false: The calculation of the portfolio beta is similar to the calculation of the portfolio weights
false
The return expected on an investment depends only on the asset's _____ risk.
systematic
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.
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.
______ risk is reduced as more securities are added to the portfolio
-diversifable -company specific -unsystematic
The _____ is the news that influences the unanticipated return on the stock.
-surprise
The true risk of any investment comes from:
-surprises -unanticipated events
What are the two components of risky return (U) in the total return equation?
-unsystematic risk -market risk (systematic risk)
what is unsystematic risk
It is a risk that affects a single asset or a small group of assets.
What is systematic risk?
It is a risk that pertains to a large number of assets.
What is the equation for total return?
Total return = Expected return + Unexpected 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.
The calculation of a portfolio beta is similar to the calculation of:
a portfolios expected return
The ---------- 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: Discounting a news item is the same as taking the present value of that item.
false
True or false: Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio increases.
false
True or false: Labor strikes are an example of systematic risk.
false
True or false: The expected return of a portfolio is a combination of the weights of each asset in a portfolio
false
Systematic risk is also called ______________ risk.
market
Systematic risk will ____ when securities are added to a portfolio.
not change
The true risk of any investment comes from _______________
surprises
Even if the portfolio is well diversified, the investor is still exposed to _____ risk.
systematic
Which of the following types of risk is not reduced by diversification?
systematic or market risk
Beta tells us the amount of ________ risk of an asset or portfolio relative to ______.
systematic; the risk-free asset
How are the unsystematic risks of two different companies in two different industries related?
there is no relationship
True or false: Adding securities will reduce unsystematic risk only. Systematic risk is unaffected by diversification.
true
What two factors determine a stock's total return?
unexpected risk & expected return
What is the beta of the risk-free asset?
zero