Chapter 8 Lecture Notes

Question 1

What is “value play”?

Answer 1

Looking for the stocks that have been beat down unfairly

Question 2

A one year doesn’t have a…

Answer 2

Maturity Risk Premium

Question 3

A global bond has an…

Answer 3

Exchange Rate Risk

Question 4

Why do people invest in bonds?

Answer 4

For safety

Question 5

How can you protect yourself from risk and still make a decent rate of return on your investments?

Answer 5

Diversify

Question 6

What is stand-alone risk?

Answer 6

Going into one stock

The risk of an asset held by itself

Question 7

What are two components of an asset’s risk?

Answer 7

1. Diversifiable risk

2. Market risk (nondiversifiable)

Question 8

What is diversifiable risk?

Answer 8

Company - specific risk

Question 9

What are examples of market risk (nondiversifiable)?

Answer 9

9/11, Jay Powell, Congress (debt ceiling), 2008

Question 10

What does market risk depend on?

Answer 10

Fear

Question 11

What is wrong with Skyworks’ stock?

Answer 11

It is very connected to Apple (20% of revenue is tied to Apple)

Question 12

-1 standard deviation TO +1 standard deviation

Answer 12

68.3%

Question 13

-2 standard deviation TO +2 standard deviation

Answer 13

95.5%

Question 14

-3 standard deviation TO +3 standard deviation

Answer 14

99.7%

Question 15

What is the most important for evaluating stock’s stand alone risk?

Answer 15

Coefficient of Variation

Question 16

Expected Return on a Portfolio

Answer 16

The weighted average of the expected returns on the individual assets in the portfolio, weights being the proportion of the portfolio invested in each asset

Question 17

Riskiness of a Portfolio

Answer 17

NOT the weighted average of the standard deviations of the individual assets in the portfolio

Question 18

State of the Economy

Answer 18

The weighted average of the squared deviations

Question 19

Positive Correlation

Answer 19

The tendency of two variables to move together

Question 20

Correlation Coefficient measures…

Answer 20

Tendency

Question 21

r = -1

Answer 21

Perfect negative correlation

One goes up and one goes down

Question 22

r = 0

Answer 22

No correlation

Question 23

r = +1

Answer 23

Perfect positive correlation

Same line

Question 24

Most stocks are ______ correlated to the market

Answer 24

Positively

Question 25

What is an example of perfect negative correlation?

Answer 25

A company that collects on default

Question 26

If you put together a portfolio of stocks that are highly positively correlated (so that when one stock's return increases, all of the stocks' returns increase), have you decreased your investment risk?

Answer 26

No

Question 27

Market Risk

Answer 27

You cannot do anything about market risk, but it still affects your portfolio

Question 28

Beta Coefficient

Answer 28

The measurement of the amount and direction of a stock's movement compared to the market's movement

Question 29

What does a stock's beta measure?

Answer 29

The contribution of the riskiness of a portfolio

Question 30

What is the beta equation?

Answer 30

(% change in a stock)/(% change in market)

Question 31

What does a positive beta mean?

Answer 31

It implies a positive correlation to the market (move in the same direction)

Question 32

"Average Stock"

Answer 32

Gives us information about the market

Question 33

Security Market Line equation

Answer 33

Required return on Stock = Risk-Free Rate + (Market Risk Premium)(Stock's Beta)