chapter 11

Question 1

portfolio

Answer 1

collection of assets

Question 2

an asset’s risk and return impact

Answer 2

how the stock affects the risk and return of the portfolio

Question 3

the risk-return trade-off is measured by

Answer 3

the portfolio expected return and standard deviation

Question 4

the expected return of a portfolio is

Answer 4

the weighted average of the expected returns for each asset in the portfolio

Question 5

weights

Answer 5

percent of portfolio invested in each asset

Question 6

portfolio standard deviation is NOT

Answer 6

a weighted average of the standard deviation of the component securities’ risk

Question 7

if the correlation between the returns on stocks is less than 1

Answer 7

portfolio standard deviation will be less than the weighted average of the standard deviation of the component securities’ risk

Question 8

systematic risk

Answer 8

factors that affect a large number of assets
- aka market/non-diversifiable risk

Question 9

systematic risk examples

Answer 9

changes in GDP, inflation, interest rates

Question 10

unsystematic risk

Answer 10

affect a limited number of assets, can be eliminated by combining assets into porfolios
- aka diversifiable/unique/asset-specific risk

Question 11

unsystematic risk examples

Answer 11

labor strikes, part shortages

Question 12

diversification can

Answer 12

• substantially reduce risk without an equivalent reduction in expected returns
• reduce variability of returns

Question 13

diversification is caused by

Answer 13

the offset of worse-than-expected returns from one asset by better-than-expected returns from another

Question 14

systematic portion

Answer 14

minimum level of risk than cannot be diversified away

Question 15

total risk =

Answer 15

systematic risk + unsystematic risk

Question 16

the standard deviation of returns is a measure of

Answer 16

total risk

Question 17

for well-diversified portfolios, unsystematic risk is

Answer 17

very small

Question 18

total risk for diversified portfolio is essentially equal to

Answer 18

systematic risk

Question 19

there is no reward for

Answer 19

bearing risk unnecessarily

Question 20

systematic risk principle

Answer 20

the expected return on a risky asset depends only on that asset’s systematic risk

Question 21

the market risk for individual securities is relevant for

Answer 21

stocks held in well-diversified portfolios

Question 22

market risk for individual securities is measured by

Answer 22

a stock’s beta coefficient, B

Question 23

beta is a measure of the

Answer 23

systematic risk of the stock

Question 24

if B = 1.0

Answer 24

stock has average risk

Question 25

if B < 1.0

Answer 25

stock is less risky than average

Question 26

if B > 1.0

Answer 26

stock is riskier than average

Question 27

beta of the market

Answer 27

1.0

Question 28

beta of a t-bill

Answer 28

0

Question 29

Bp =

Answer 29

weighted average of the betas of the assets in the portfolio

Question 30

capital asset pricing model (CAPM)

Answer 30

defines relationship between risk and return

Question 31

if an asset's systematic risk, or B, is known

Answer 31

CAPM can be used to determine its expected return

Question 32

the higher the beta,

Answer 32

the greater the risk premium should be

Question 33

security market line (SML)

Answer 33

part of CAPM, tells us reward offered in financial markets for bearing risk. this gives us a benchmark against which we compare the returns expected from real assets to determine if they are desirable