Flashcards in Risk and Return Deck (22):

1

## The process that connects risk and return to the worth of an asset is called _________.

### valuation

2

## The ____ and return concepts can be examined on the basis of a single asset or a portfolio of assets.

### risk

3

## _______ means a group of assets.

### Portfolio

4

## ____ can be defined as the quantifiable variability of returns from a specific asset.

### Risk

5

## 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.

### distributions

6

## Risk can be analyzed from both a behavioral and ____________ perspective.

### quantitative

7

## __________ 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.

### Behavioral

8

## Risk can be calculated using _____________ by working out the odds that a particular outcome will occur.

### probabilities

9

## Probabilities is a better measure for risk than _____________ analysis.

### sensitivity

10

## A continuous probability ____________ is a curve that displays all the values that the random variable can take and the probability that each will occur.

###
distribution

Explanation:

It is continuous because it does not just show one or several outcomes but all of them for the given range.

11

## The most popular statistical measure of an assets risk is the standard _________, which calculates the volatility of the expected value.

###
deviation

Explanation:

This is the definition of standard deviation. The higher the dispersion/deviation, the higher the risk.

12

## Where there are various expected returns, the coefficient of _________ will be the preferable measure of risk.

### variation

13

## 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.

### dispersion

14

## 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.

### efficient

15

## In order to minimize overall risk, it is advisable to mix ________ correlated assets.

### negatively

16

## 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.

### reduced

17

## International portfolio ____________ reduces risk.

### diversification

18

## Foreign currency dominations reduce the correlations of the returns and foreign assets are less likely to be impacted by _____ market movements.

### local

19

## ______ risk is made up of diversifiable and nondiversifiable risk.

### Total

20

## 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.

### Nondiversifiable

21

## The capital asset pricing model (CAPM) assesses risk by linking nondiversifiable risk with the asset ______.

### return

22