Lecture 7:

Question 1

What are future returns dependent on?

Answer 1

The state of the world

Question 2

What are states?

Answer 2

Exhaustive and mutually exclusive

Question 3

What is expected return?

Answer 3

The return you expect to receive on average. Also called investor’s required return

Question 4

How do you calculate actual return?

Answer 4

Actual return = Expected return + unexpected return

Question 5

What are examples of portfolios?

Answer 5

Dividing investment equally between x amount of shares

Dividing investments unevenly among x amount of shares

Question 6

What is portfolio diversification?

Answer 6

Portfolio diversification is the strategy of spreading investments across various asset classes, sectors, and geographic regions

Question 7

What is portfolio return?

Answer 7

A weighted average of security returns included in the portfolio

Question 8

Does portfolio diversification increase or reduce risk?

Answer 8

eliminates unsystematic risk leaving only systematic risk

Question 9

What is systematic risk?

Answer 9

Sources of risk potentially impacts many securities to various extents e.g. information surprises about inflation, interest rates and industrial productivity

Question 10

What is unsystematic risk?

Answer 10

Sources of risk affecting indiividual or a small group of securities e.g. surprise drug discoveries, corporate boardroom problems, takeover bids etc

Question 11

What is the systemic risk principle?

Answer 11

Investors require higher expected return to compensate them for only systematic risk