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Finance Fundamentals > WEEK 9 > Flashcards

WEEK 9 Flashcards

(61 cards)

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1
Q

The variance of the portfolio ______ as more securities are added.

A

decreases

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2
Q

Adding a negative-beta security to a large, diversified portfolio
…. the risk of the portfolio.

A

reduces

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3
Q

A risk-averse investor would prefer to avoid gambles with
….. expected return.

A

zero

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4
Q

The unsystematic risk is also called ______.

A

unique risk

diversifiable risk

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5
Q

The risky assets portfolio that all investors choose is called the ______.

A

market portfolio

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6
Q

The risk investors still face after achieving full diversification is called ______.

A

portfolio risk

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7
Q

The variance of a portfolio with one security is the …
of the security

A

variance

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8
Q

A typical investor would be ______.

A

risk averse

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9
Q

The risk that can be diversified away in a large portfolio is called ______.

A

unsystematic risk

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10
Q

Portfolio risk is often called ____

A

systematic risk

market risk

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11
Q

For given variances of two individual securities, the variance of an entire portfolio is decreased by a ….
covariance between those two securities included in the portfolio.

A

negative

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12
Q

As the number of securities in a portfolio becomes larger, the variance of the portfolio becomes the average …

A

covariance

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13
Q

As the number of securities in a portfolio becomes larger, the variance of the portfolio becomes the average

A
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14
Q

The variance of the portfolio ______ as more securities are added.

A

decrease

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15
Q

In saying that we should not “put all our eggs in one basket”, we are referring to Blank______.

A

diversification

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16
Q

What happens with the variance(s) of individual securities as the number of securities in a portfolio becomes large.

A

Their impact on the variance of the portfolio decreases

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17
Q

The diversification effect applies as long as correlation is ____

A

<1

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17
Q

While the variances of the individual securities are diversified away by including more assets in a portfolio, the
….. terms cannot be diversified away.

A

covariance

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18
Q

The covariance between any two securities is the correlation between the two securities
… by the standard deviations of each.

A

multiplied

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19
Q

As long as the ______ is less than 1, the standard deviation of a portfolio of two securities is less than the weighted average of the standard deviations of the individual securities.

A

correlation

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20
Q

If the variance of a portfolio is 0.0025, what is its standard deviation?

A

Reason: σp=.0025.5=.05, or 5%

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21
Q

Under what condition will the standard deviation of a portfolio be equal to the weighted average of the standard deviations of the individual securities?

A

When the correlation coefficient for all pairs of securities is equal to 1.

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22
Q

Covariance incorporates the __ and the __.

A

correlation between two assets

standard deviation of the two assets

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23
Q

A hedge (in finance) means that the ______.

A

risk of a portfolio decreases

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24
It is possible for the standard deviation of a portfolio to be .... than/to a weighted average of the standard deviations of the individual securities.
less
25
If the variance of a portfolio increases, then the portfolio standard deviation will ______.
increase
26
An equally weighted portfolio consists of securities A and B which have a variance of 0.06 and 0.08 respectively. If the covariance of these securities is 0.02, what is the portfolio's variance?
Reason: VP = (0.25x0.06) + (0.25x0.08) + (2x0.5x0.5x0.02) = 0.045 = 4.5%
27
Two securities are offsetting each other when ______.
one tends to go up when the other goes down.
28
The expected return on both securities A and B is 10%. What is the expected return on a portfolio consisting of these two securities?
10%
29
If security A's return is generally above its average when security B's return is below its average, and security A's return is generally below its average when security B's return is above its average, the covariance of their returns will be ______.
negative
30
The variability of individual securities is measured by _____
standard deviation variance
31
Kurtosis is a measure of risk that is related to the ______.
distribution of returns.
32
The variance of a portfolio depends on ______.
the variances of the individual securities the covariance between two securities
33
The expected return on a portfolio is the ..... ...... of the expected returns on the individual securities.
weighted avaerage
34
The skewness risk is a measurement of ___
the degree to which a return series is skewed.
35
What does a correlation coefficient of -1 imply for the returns of two securities?
The returns of the securities are perfectly negative correlated.
36
When the normal distribution is symmetric, it means that ______.
downside and upside observations are equally likely
37
The relationship between two random variables is given by ______.
correlation and covariance
38
The measure of the frequency of very negative and very positive returns is _____
kurtosis
39
Dividing the proportion of variation that is caused by upside deviations from the mean by the proportion of variation caused by downside deviations from the mean is known as _____
skewness risk
40
The degree to which observations are likely to be on the downside or upside is measured by ______.
skewness
41
The semi-variance has the advantage that only those ______ that are below the target return are considered in the risk measure.
deviations
42
Semi-variance is calculated as _____
1/n-1[Σ(target - r) x 2 ]
43
Many investors perceive a .... in the value of their investment to be significantly more risky than an investment that .... in value.
decrease, grows
44
What shape of curve would a large enough sample drawn from a normal distribution produce?
bell- shaped
45
One of the major drawbacks of variance and standard deviation is that they assume that .... in share prices are just as risky as price .....
increase, falls
46
The denominator in the calculation of beta is the ____
variance of market returns
47
An individual holding a diversified portfolio is interested in the contribution of an individual security to the Blank______ of the portfolio.
standard deviation variance
48
Negative betas securities can be viewed as
insurance policies.
49
According to the CAPM, the expected return on the market portfolio is the sum of the risk premium and the ___
risk-free rate
50
The formula to calculate the beta of an asset is ___
β= Cov(Ri,RM) / σ2(RM)
51
Adding together the risk-free rate plus some compensation for the risk inherent in the market portfolio, an investor would get the
expected return on the market.
52
The return on government bonds (risk-free) is 3% and the market risk premium is 2%. If the CAPM holds, what is the expected return on the market portfolio?
Reason: it is 3% + 2% = 5%
53
If the stock of BMW has a beta of 1.2 and expected return equal to 12%, what is the risk-free return if the market risk premium is 7%?
Reason: Rf=12% - (1.2 x 7%) = 3.6%
54
Identify two of conditions upon which the CAPM has been based:
the market is efficient investors have homogeneous expectations
55
The .... return on the market is the sum of the risk-free rate plus some compensation for the risk inherent in the market portfolio.
expected
56
According to the CAPM, the appropriate measure of risk is _____
beta
57
If the stock of RBS has a beta of 2 and expected return equal to 10%, what is the market risk premium if the risk-free rate is 3%?
Reason: Risk Premium = (10% - 3%) / 2 = 3.5%
58
According to the Capital Asset Pricing Model, the expected return on a security is related to its ______.
beta
59
Securities that lie above the SML are ______ according to the CAPM.
underpriced
60
The securities that have ______ -beta should have an expected return above that of low-beta securities.
high

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