Flashcards in Risk and Return Deck (22):
The process that connects risk and return to the worth of an asset is called _________.
The ____ and return concepts can be examined on the basis of a single asset or a portfolio of assets.
_______ means a group of assets.
____ can be defined as the quantifiable variability of returns from a specific asset.
Risk must be assessed in relation to return. Return can be calculated by taking the change in value of an asset and adding on any cash _______________, for example dividends; and then expressing this as a percentage of the initial investment.
Risk can be analyzed from both a behavioral and ____________ perspective.
__________ methods, like the sensitivity analysis, attempts to predict the outcome by varying the possible returns. This will give the Financial Manager a feel as to the range (best to worst) of risk.
Risk can be calculated using _____________ by working out the odds that a particular outcome will occur.
Probabilities is a better measure for risk than _____________ analysis.
A continuous probability ____________ is a curve that displays all the values that the random variable can take and the probability that each will occur.
It is continuous because it does not just show one or several outcomes but all of them for the given range.
The most popular statistical measure of an assets risk is the standard _________, which calculates the volatility of the expected value.
This is the definition of standard deviation. The higher the dispersion/deviation, the higher the risk.
Where there are various expected returns, the coefficient of _________ will be the preferable measure of risk.
Coefficient (CV)measures relative ___________ which makes it useful in calculating the risk of assets with variable expected returns. The higher the coefficient, the higher the risk.
An _________ portfolio is one which provides the highest expected return for a given level of risk, or the lowest risk for a given expected return.
In order to minimize overall risk, it is advisable to mix ________ correlated assets.
By mixing negatively correlated assets, total risk will be _______. For example Business A wants to buy another business. Business A is cyclical, with high sales in the summer. They should purchase a countercyclical business with high sales in the winter as they will have negatively correlated sales.
International portfolio ____________ reduces risk.
Foreign currency dominations reduce the correlations of the returns and foreign assets are less likely to be impacted by _____ market movements.
______ risk is made up of diversifiable and nondiversifiable risk.
Diversifiable risk is that which results from company specific events, for example strikes, loss of key customer etc. This risk can be eliminated through diversification. _____________ risk is the result of market causes that affect all companies and cannot be eliminated through diversification. Therefore, the only relevant risk is nondiversifiable risk.
The capital asset pricing model (CAPM) assesses risk by linking nondiversifiable risk with the asset ______.