final exam dump

Because these risks are unique to individual companies or assets, they are sometimes called unique or asset-specific

unsystematic

There is a minimum level of risk that cannot be eliminated simply by diversifying. This minimum level is labeled

"no diversifiable risk"

is the amount of net income returned as a percentage of shareholder's equity------measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested.

. Return on equity ROE

What the CAPM shows is that the expected return for a particular asset depends on three things.

1. The pure time value of money 2. The reward for bearing systematic risk 3. The amount of systematic risk

works for portfolios of assets just as it does for individual assets.

CAPM

is the profit or loss an investor anticipates on an investment that has known or -----. It is calculated by multiplying potential outcomes by the chances of them occurring and then summing these results.

Expected return

The total value of all the goods and services produced within a country's borders is described as its

Gross domestic product (GDP).

is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. ----- is used in capital budgeting to analyze the profitability of a projected investment or project.

Net present value (NPV)

After Npv, the ----is arguably the most important concept in modern finance

SML

also known as "market risk" or "un-diversifiable risk", is the uncertainty inherent to the entire market or entire market segment. Also referred to as volatility, ---- consists of the day-to-day fluctuations in a stock's price.

Systematic risk

-----on a new project is the minimum expected rate of return an investment must offer to be attractive.

The appropriate discount rate

is the difference between what an investor expects to make as a return on an equity portfolio and the risk-free rate of return.

The historical market risk premium

If the announced GDP is a surprise, then the effect will be part of the--, the ----portion of the return

U, unanticipated

-----risk is essentially eliminated by diversification, so a relatively large portfolio has almost no ------ risk.

Unsystematic

an asset or object bought or obtained.

acquisition

property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.

asset

Combining ---- into portfolios can substantially alter the risks faced by the investor

assets

Amount of systematic risk present in a particular risky asset relative to that in an average risky asset.

beta coefficient

Tells us how much systematic risk a particular asset has relative to an average asset

beta coefficient

Equation of the security market line showing the relationship between expected return and beta.

capital asset pricing model (CAPM)

The minimum required return on a new investment.

cost of capital

When we say that we ----an announcement, or a news item, we mean that is less of an impact on the market because the market already knew much of it.

discount

A common way of saying that an announcement isn't news is to say that the market has already "-----" the announcement

discounted

The process of spreading an investment across assets and thereby forming a portfolio is called

diversification

some but not all, of the risk associated with a risky investment can be eliminated by----. The reason that unsystematic risks, which are unique to individual assets, tend to wash out in a large portfolio, but systematic risks, which affect all of the assets in a portfolio to some extent, do not.

diversification

a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves)

dividend

To the extent that shareholder have predicted GDP, that prediction will already be factored into the ----part of the return on the stock

expected E(R)

At an absolute minimum, any new investment our firm undertakes must offer and that is no worse than what the financial markets offer for the same risk. The reason for that is our shareholders can always invest for themselves in the financial markets.

expected return

The and thus the ----on an asset depends only on its systematic risk

expected return, risk premium

The only way we benefit our shareholders is by finding investments with ----that are superior to what the financial markets offer for the same risk.

expected returns

A systematic risk can be eliminated by diversification (T/F)

false

Some of the riskiness associated with individual assets can be eliminated by

forming portfolios

Since assets with larger betas have greater systematic risks, they will have greater/smaller expected returns

greater

The difference between the actual result and the forecast, is sometimes called the ----- or -----

innovation, surprise

Slope of the security market line; the difference between the expected return on a market portfolio and the risk-free rate.

market risk premium

Is the part of the return that shareholder in the market predict or expect.

normal (expected)

This return depends on the information shareholders have that bears on the stock, and it based on the market's understanding today of the important factors that will influence the stock in the coming year.

normal (expected)

The return on a stock traded in the financial market is composed of two parts

normal (expected) and uncertain (risky)

An asset is said to be (under/over) valued if it's price is too high given its expected return and risk

overvalued

Group of assets such as stocks and bonds held by an investor.

portfolio

Percentage of a portfolio's total value in a particular asset.

portfolio weight

The most convenient approach to describing a portfolio is to list the percentages of the total portfolio's value that are invested in each portfolio asset. We call these percentages the

portfolio weights

Spreading an investment across a number of assets will eliminate some, but not all, of the risk.

principle of diversification

Is it possible for an asset to exceed 100%? Yes. This can happen is for the investor to borrow at a

risk free rate

a reward on average for bearing risk

risk premium

is a tradable financial asset of any kind.

security

Positively sloped straight line displaying the relationship between expected return and beta.

security market line (SML)

Affects almost all assets in the economy (systematic/unsystematic)

systematic

Because ----risks have marketwise effects, they are sometimes called market risks

systematic

No matter how many assets we put into a portfolio, the ---- risk doesn't go away

systematic

The expected return on an asset depends only on that asset's ---- risk

systematic

To a diversified investor only (systematic/unsystematic) matters

systematic

Uncertainties about general economic conditions, such as GDP, interest rates, or inflation, are examples of ----risks

systematic

There are two types of risk

systematic and unsystematic

Two types of surprises

systematic and unsystematic

A risk that influences a large number of assets, called market risk

systematic risk

Because the portfolio is a representative of all the assets in the market, it must have average

systematic risk

also called market risks, are unanticipated events that affect almost all assets to some degree because the effects are economy.

systematic risk

States that the reward for bearing risk depends only on the systematic risk of an investment

systematic risk principle

The expected return on a risky asset depends only on that asset's systematic risk.

systematic risk principle

states that the reward for bearing risk depends only on the level of systematic risk. The level of systematic risk in a particular asset, relative to the average, is given by the beta of that asset.

systematic risk principle

As measured by Bi, this is the amount of systematic risk present in a particular asset, relative to an average asset.

the amount of systematic risk

A measured by the risk-free rate (Rf), this is the reward for merely waiting for your money, without taking any risk

the pure time value of money

As measured by the market risk premium [E(Rm)-Rf], this component is the reward the market offers for bearing an average amount of systematic risk in addition to waiting.

the reward for bearing systematic risk

For asset I, it's the ratio of its risk premium, E(Ri-Rf) to its beta, Bi: E(Ri)-Rf/Bi

the reward to risk ratio

In a well-functioning market, this ratio is the same for every asset.

the reward to risk ratio

The reward-to-risk ratio must be (different/the same) for all assets in the market.

the same

the ----- on an investment has two components; the expected return and the unexpected return. The unexpected return comes about because of unanticipated events. The risk from investing stems from the possibility of an unanticipated event.

total return

the --- of an investment is measured by the variance, or more commonly, the standard deviation of its return

total risk

If one asset has twice as much systematic risk as another asset, it's risk premium will simply be ----as large.

twice

The -----part of the return, is the true risk of any investment.

unanticipated

This is the portion that comes from unexpected information revealed within the year.

uncertain (risky)

News about research on flyers, government figures released on GDP, the results from the latest arms control talks, the news that flyers sales figures are higher than expected, a sudden, unexpected drop in interest rates, these are all examples of what?

uncertain risky part of return on stock

----risks are unanticipated events that affect single assets or small groups of assets. These are also called unique or asset-specific risks

unsystematic

A risk that affects at most a small number of assets. Also unique or asset-specific risk

unsystematic

Affects at most a small number of assets (systematic/unsystematic)

unsystematic

An oil strike is an example of a (unsystematic or systematic) risk

unsystematic

If the asset under consideration is stock in a single company, the discovery of positive NPV projects will tend to increase the value of the stock, so decreasing --- risk

unsystematic

Are often used interchangeably

unsystematic and diversable

is a statistical measure of how much a set of observations differ fromeach other?

variance