Chapter 13 - FIN3403 - Return, Risk, and Security Market Line

A security has a beta of 1, the market risk premium is 8%, and the risk-free rate is 3%. What will happen to the expected return if the beta doubles?

(Risk Free Rate) + (Beta) X (Risk Premium) (3%) + (2) X (8%) = 19%

Definition of Expected Return:

-a return on a risky asset expected in the future.

The minimum required return on a new project is known as:

-cost of capital

What does variance measure?

-it measures the riskiness of security returns -it measures the dispersion of the sample of returns

The risk of owning an asset comes from:

-surprises -unanticipated events

When an investor is diversified only _____ risk matters.

-sytematic

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

-that are born unnecessarily.

How are the systematic risks of two different companies in two different industries related?

-there is no relationship.

If the standard deviation of a portfolio is .0025, what is the standard deviation?

.0025^.5 = .05 = 5% or square root of .0025 = .05 = 5%

4 steps of computation of variance:

1. Calculate the expected return. 2. Calculate the deviation of each return from the expected return. 3. Square the deviation. 4. Calculate the average squared deviation.

Which of the following are true about variance? 1. Computation of variance requires the use of a computer. 2. Variance measures a security's expected return over many periods. 3. Standard deviation is the square root of the variance. 4. Variance is a measure of the squared deviations of a security's return from its expected return.

3. Standard deviation is the square root of the variance. 4. Variance is a measure of the squared deviations of a security's return from its expected return.

What is unsystematic risk?

It is a risk that affects a single asset or a small group of assets.