chapter 13 fin man vocab

The risk of owning an asset comes from:

- unanticipated events - surprises

By definition, what is the beta of the average asset equal to?

1

The weighted average of the standard deviations of the assets in Portfolio C is 12.9%. Which of the following are possible values for the standard deviation of the portfolio?

10.9 12.0

How can a positive relationship between the expected return on a security and its beta be justified?

Because the difference between the return on the market and the risk-free rate is likely to be positive

What does the security market line depict?

It is a graphical depiction of the capital asset pricing model.

What is systematic risk?

It is a risk that pertains to a large number of assets.

What is an uncertain or risky return?

It is the portion of return that depends on information that is currently unknown.

What is the definition of expected return?

It is the return that an investor expects to earn on a risky asset in the future.

Which type of risk does not change as we add more securities to a portfolio?

Systematic, or market, 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

Which of the following are needed to describe the distribution of stock returns?

The standard deviation of returns The mean 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 portfolio's expected return

In an efficient market:

all investments are zero NPV investments assets are priced at the present value of their future cash flows

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

If the market changes and stock prices instantly and fully reflect new information, which time path does such a change exhibit?

an efficient market reaction

Some important characteristics of the normal distribution are that it is:

bell-shaped symmetrical

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

beta

When a company declares a dividend, shareholders generally receive ______.

cash

The geometric rate of return takes ______ into account.

compounding

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

In an efficient market, firms should expect to receive ______ value for securities they sell.

fair

True or false: Systematic risk will impact all securities in every portfolio equally.

false

True or false: The process to calculate a portfolio's beta is opposite of the process to calculate a portfolio's expected return.

false

True or false: The smaller the variance or standard deviation is, the more spread out the returns will be.

false

The ---- the risk, the greater the required return.

greater

An efficient market is one in which any change in available information will be reflected in the company's stock price ___.

immediatly

Dividends are the ______ component of the total return from investing in a stock.

income

An efficient market is one that fully reflects all available ______.

information

strong form efficiency

it implies that all information of every kind is reflected in stock prices

Semistrong form efficiency

it is the most controversial, and all public information is reflected in the stock price

Weak form efficiency

it suggest that, at a minimum, the currect price of a stock reflects the stock's own past prices

Variance is measured in ___, while standard deviation is measured in ___.

percent squared; percent

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

positive

The Sharpe ratio measures ___.

reward to risk

Geometric averages are ______ arithmetic averages.

smaller than

The principle of diversification tells us that spreading an investment across a number of assets will eliminate Blank______ of the risk.

some

The standard deviation is the ______ of the variance.

square root

The principle of diversification tells us that, to a diversified investor, the only type of risk that matters is (systematic/unsystematic) risk.

systematic

Which type of risk is unaffected by adding securities to a portfolio?

systematic risk

Studying market history can reward us by demonstrating that _____.

the greater the potential reward is, the greater the risk on average, investors will earn a reward for bearing risk

The portfolio weight is _____.

the percentage of the total value that is invested in an asset

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 standard deviation is ___.

the square root of the variance

The standard deviation is ___. Multiple choice question.

the square root of the variance

Average returns can be calculated _____.

two different ways

The true risk of any investment is the _____ portion.

unanticipated

A distribution tends to have a smooth shape when the number of observations is ___

very large

The efficient markets hypothesis contends that _____ capital markets such as the NASDAQ are efficient.

well-organized

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.

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.

Which of the following are examples of a portfolio?

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

Asset A has an expected return of 17 percent and standard deviation of 5 percent. Asset B has an expected return of 15 percent and standard deviation of 5 percent. Which asset would a rational investor choose? Multiple choice question.

asset A

When we----- an announcement or a news item, we say that it has less of an impact on price because the market already factored it in.

discount

When an investor is diversified only ________ risk matters.

systematic