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BSNS114 > Topic 9- Risk and Return > Flashcards

Topic 9- Risk and Return Flashcards

1
Q

Single asset or portfolio when it comes to returns…

A

single asset returns are more volatile than that of a portfolio

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2
Q

a portfolio is

A

a collection of assets

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3
Q

in a portfolio the weight of an asset determines…

A

how the asset contributes to the overall return

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4
Q

the return of a portfolio formula

A

sum of weight x return

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5
Q

the expected return of a portfolio

A

sum of: prob x return

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6
Q

std formula

A

square root of: sum of: prob x (return-expected return)^2

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7
Q

the std of a portfolio is the …

A

spread of returns about the expected return

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8
Q

std of a portfolio measures

A

the systematic + firm risk (total risk) for a stock

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9
Q

Total risk is

A

std

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10
Q

Systematic risk is

A

Beta

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11
Q

Diversification

A

means investing is more than 2 risky assets whose values don’t move in same direction at same time

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12
Q

if you have diversification combining risky assets into a portfolio risk is

A

offset due to the low correlations

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13
Q

diversification can be either

A

within 1 asset class (stocks but diff industries) or spread across classes (stocks, bonds…)

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14
Q

as you increase the number of stocks the std

A

decreases, but never approaches 0

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15
Q

2 types of risk

A

firm-specific risk/ unsystematic risk/ diversifiable risk
systematic risk/market risk/ non-diversifiable

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16
Q

firm specific /unsystematic risk/ diversifiable risk

A

unique risk to individual asset

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17
Q

which risk can be diversified away?

A

firm specific /unsystematic risk/ diversifiable risk

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18
Q

which risk are you compensated for?

A

systematic only

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19
Q

systematic risk is driven by

A

changes of macroeconomic factors

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20
Q

systematic risk measures the relationship between

A

returns of individual assets and returns of the most diversified portfolio (mafrket portfolio)

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21
Q

the expected return is the av of

A

probability of distribution of possible returns

22
Q

the unexpected return is

A

driven by risk and the portion of inventory gain or loss due to unforseen circumstances

23
Q

Beta

A

measure of systematic risk (non-diversifiable/market risk)

24
Q

Beta is a measure of co….

A

covariance of stock with returns of a portfolio

25
Q

The required return will be a

A

linear function of its beta

26
Q

Expected return (inc rf rate)

A

= rf + (B(E(p)-rf))

27
Q

Beta>1

A

above average risk

28
Q

Beta=1

A

Average risk

29
Q

Beta<1

A

Below average risk

30
Q

Beta=0

A

riskless investment

31
Q

Beta equation

A

weight x Bi

32
Q

Beta is the slope of

A

the return of market index vs return for a stock

33
Q

increased B means Increased

A

return

34
Q

CAPM is

A

capital asset pricing model

35
Q

CAPM eq

A

=rf+(B((E(rm)-rf))

36
Q

in the CAPM equation which part is the market risk premium

A

(E(r)-rf)

37
Q

in the CAPM equation which part is the risk premium

A

(B((E(r)-rf))

38
Q

what is plotted on the security market line

A

expected return vs B

39
Q

what does it tell us if assets and portfolios are not plotted on the security line?

A

the info of mispricing will be taken advantage of that they are over or underpriced

40
Q

What is an appropriate return for an asset with no systematic risk?

A

risk free rate

41
Q

The CAPM helps us as it tells us what …. will require from an investment with particular ….

A

rate of return
systematic risk

42
Q

How do you work out the expected return for a single stock?

A

(pboom x S1(r)boom)+(bust x S1(r)bust)

43
Q

How do you work out the portfolio’s expected return?

A

return (boom)= (ws1xr boom s1) +(ws2xr booms 2
return (bust)= same but for busts
expected return (p)= (p boom x r boom)+ (p bust x r bust)

44
Q

The std (risk) of small stocks vs large stocks and then corp bonds vs treasury bills

A

small > large (because more risk)
corp > treasury

45
Q

An increased variability means increased std means increased

A

return

46
Q

stocks generally in the long run have a ……. than bonds

A

higher return than bonds

47
Q

rational investors are against… in investment values

A

fluctuations (measured by volatility)

48
Q

higher volatility means

A

higher return

49
Q

investors need higher r in higher volatile investments since they do or don’t like risk

A

don’t like risk

50
Q

if stock A is more volatile than stock but the arithmetic average is the same which stock will have a lower geometric average

A

A<B

BSNS114 (13 decks)

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