FIN 320 Chapter 11 Smartbook

Total return =

expected return + unexpected return

systematic risk is also called _______ risk

market

the return expected on an investment depends only on the asset's _____ risk

systematic

the return expected on an investment depends only on the asset's _________ risk

systematic

the true risk of any investment comes from

-surprises -unanticipated events

the computation of variance requires 4 steps. Place the steps in the correct order from the first step to the last step.

1. calculate the expected return 2. calculate the deviation of each return from the expected return 3. square each deviation 4. calculate the average squared deviation

What is an uncertain or risky return?

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

risk premium

additional compensation for taking risk, over and above the risk-free rate

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 indicated that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio:

declines

t/f discounting a news item is the same as taking the present value of that item

false

t/f the calculation of the portfolio beta is similar to the calculation of the portfolio weights

false

t/f the surprise part of any announcement is the information the market uses to form the expectation of the return on the stock

false

Expected return

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

systematic risk will __________ when securities are added to a portfolio

not change

If investors are risk averse, it is reasonable to assume that the risk premium for the stock market will be:

positive

variance

standard deviation is the square root of ______, _______ is a measure of the squared deviations of a security's return from it expected return

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

that are borne unnecessarily, that are diversifiable, that are systematic

t/f it is possible for the unsystematic risk of a portfolio to be reduced almost to zero

true

beta tells us the amount of __________ risk of an asset or portfolio relative to ________

unsystematic; an average risky asset