Exam 12: Financial Return and Risk Concepts

Business risk is variations in sales over time.

The slope of the linear relation between the returns on a stock and the returns on the market portfolio is called the:

The market portfolio is a portfolio that contains all risky assets.

Standard deviation is the square root of the coefficient of variation.

The greatest level of risk reduction through diversification can be achieved when combining two securities whose returns are perfectly negatively correlated.

The expected rate of return on a portfolio is the weighted average of the expected returns of the individual assets in the portfolio.

The return on a portfolio is simply equal to the weighted average return of the securities that comprise it.

The coefficient of variation is calculated as the variance divided by average returns R.

The only relevant risk for investors that hold diversified portfolios of securities is undiversifiable risk.

According to the definitions given in the text, if Stock A has a standard deviation of 4% and expected returns of 9%, and Stock B has a standard deviation of 3% and returns of 1%, which stock is riskier?

If Stock A is considered to be of lower risk than Stock B, then Stock A should have returns that are

The effect on revenues and expenses from variations in the value of the U.S. dollar in terms of other currencies is called:

A fruit company has 20% returns in periods of normal rainfall and -3% returns in droughts. The probability of normal rainfall is 60% and droughts 40%. What would the fruit company's expected returns be?

Asset A has a coefficient of variation of 1.2 and asset B has a coefficient of variation of 1.0. Based on this information, an individual would choose asset ____ if he or she wishes to maximize return for a given level of risk.

The variance of a portfolio can be calculated by finding the variances of the individual components of the portfolio and finding the weighted average of those variances.

A statistical concept that relates movements in one set of returns to movements in another set over time is called:

Any consistent trend in the same direction as the price change would be evidence of an efficient market.

If Stock A has a higher standard deviation than Stock B, it will also have a greater coefficient of variation.

The strong-form efficient market implies that:

The security market line can be used to determine the expected return on a security if we know the: