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
