FN340 ch.13

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

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

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

The cost of ________ is the minimum required return on a new investment.

capital

The variance of a portfolio (is/isn't) generally a simple combination of the variances of the assets in the portfolio.

isn't

Assets A and B each have an expected return of 10 percent. Asset A has a standard deviation of 12 percent while Asset B has a standard deviation of 13 percent. Which asset would a rational investor choose?

Asset A

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.

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

Systematic, or market, risk

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

beta

There is ______ correlation between the unsystematic risk of two companies from different industries.

no

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

positive

The ________ risk principle argues that the market does not reward unnecessary risk that is taken on by the investor.

systematic

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

that are borne unnecessarily

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

some

When should an investor not convert convertible bonds to common stocks at the maturity date?

When the conversion value is less than the straight bond value

The SML is very important because it tells us the "going rate" for bearing ________ in the economy.

risk

When an investor is diversified only ________ risk matters.

systematic

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

weight

What is systematic risk?

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

Convertible bondholders should convert to common stock at the maturity date if the conversion value is _____.

greater than the straight bond value

What are the two components of unexpected return (U) in the total return equation?

- The unsystematic portion - The systematic portion

What is the definition of expected return?

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

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 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 or 12.9

What is an uncertain or risky return?

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

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 ________ is the squared standard deviation.

variation

The risk-free asset has a beta of _____.

0.00

Which of the following are examples of a portfolio? A) Investing $100,000 in a combination of U.S. and Asian stocks B) Investing $100,000 in the stocks of 50 publicly traded corporations C) Holding $100,000 in cash to buy after five years 100 shares of the best performing stock on the NYSE D) Holding $100,000 investment in a combination of stocks and bonds

A, B, and D

When is it profitable to convert convertible bonds to common stock at the maturity date?

When the conversion value exceeds the straight bond value.

The calculation of a portfolio beta is similar to the calculation of _____.

a portfolio's expected return

he 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

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

discount

The ________ return is the return that an investor will probably earn on a risky asset in the future.

expected