FIN 320 SB chapter 11

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

declines

True or false: Expected return and inflation are the two components of risky return in the total return equation

false

True or false: The calculation of the portfolio beta is similar to the calculation of the portfolio weights

false

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

systematic

As more securities are added to a portfolio, what will happen to the portfolio's total unsystematic risk?

-It is likely to decrease. -It may eventually be almost totally eliminated.

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.

______ risk is reduced as more securities are added to the portfolio

-diversifable -company specific -unsystematic

The _____ is the news that influences the unanticipated return on the stock.

-surprise

The true risk of any investment comes from:

-surprises -unanticipated events

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

-unsystematic risk -market risk (systematic risk)

what is unsystematic risk

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

What is systematic risk?

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

What is the equation for total return?

Total return = Expected return + Unexpected 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 portfolios expected return

The ---------- return on a portfolio is a combination of the expected returns on the assets in the portfolio.

expected

True or false: A well-diversified portfolio will eliminate all risks.

false

True or false: Discounting a news item is the same as taking the present value of that item.

false

True or false: Historical return data indicates that as the number of securities in a portfolio increases, the standard deviation of returns for the portfolio increases.

false

True or false: Labor strikes are an example of systematic risk.

false

True or false: The expected return of a portfolio is a combination of the weights of each asset in a portfolio

false

Systematic risk is also called ______________ risk.

market

Systematic risk will ____ when securities are added to a portfolio.

not change

The true risk of any investment comes from _______________

surprises

Even if the portfolio is well diversified, the investor is still exposed to _____ risk.

systematic

Which of the following types of risk is not reduced by diversification?

systematic or market risk

Beta tells us the amount of ________ risk of an asset or portfolio relative to ______.

systematic; the risk-free asset

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

there is no relationship

True or false: Adding securities will reduce unsystematic risk only. Systematic risk is unaffected by diversification.

true

What two factors determine a stock's total return?

unexpected risk & expected return

What is the beta of the risk-free asset?

zero