Exam 8: Risk and Return

An efficient portfolio is one that

Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during that period. What is the asset's rate of return if it can be sold for $26,750 today?

When the U.S. currency gains in value, the dollar value of a foreign-currency-denominated portfolio of assets decline.

Table 8.3 Consider the following two securities X and Y. -________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, all else remaining the same.

Examples of events that increase risk aversion include

War, inflation, and the condition of the foreign markets are all examples of

Beta coefficient is an index of the degree of movement of an asset's return in response to a change in the risk-free asset.

Since for a given increase in risk, most managers require an increase in return, they are

What is the expected return for asset X if it has a beta of 1.5, the expected market return is 15 percent, and the expected risk-free rate is 5 percent?

An approach for assessing risk that uses a number of possible return estimates to obtain a sense of the variability among outcomes is called sensitivity analysis.

The creation of a portfolio by combining two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset. On the other hand, a portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

The beta of the market

A collection of assets is called a(n)

For the risk-indifferent manager, no change in return would be required for an increase in risk.

An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is

The beta of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

A portfolio combining two assets with less than perfectly positive correlation can reduce total risk to a level below that of either of the components.

Table 8.3 Consider the following two securities X and Y. -Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent of your money in X, borrow an amount equal to half of your own investment at the risk free rate and invest your borrowings in asset X?

For the risk-averse manager, required return would decrease for an increase in risk.

Tim purchased a bounce house one year ago for $6,500. During the year it generated $4,000 in cash flow. If Time sells the bounce house today, he could receive $6,100 for it. What would be his rate of return under these conditions?