Exam 8: Risk and Return

The ________ is the extent of an asset's risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.

One measure of t he risk of an asset may be found by subtracting the worst outcome from the best outcome.

On average, during the past 75 years, the return on U.S. Treasury bills has exceeded the return on long-term government bonds.

Given the following probability distribution for assets X and Y, compute the expected rate of return, variance, standard deviation, and coefficient of variation for the two assets. Which asset is a better investment?

Nondiversifiable risk reflects the contribution of an asset to the risk, or standard deviation, of the portfolio.

The purpose of adding an asset with a negative or low positive beta is to

Purchasing-power risk is the chance that changes in interest rates will adversely affect the value of an investment; most investments decline in value when the interest rates rise and increase in value when interest rates fall.

Market risk is the chance that a totally unexpected event will have a significant effect on the value of the firm or a specific investment.

On average, during the past 75 years, the return on large-company stocks has exceeded the return on long-term corporate bonds.

The value of zero for beta coefficient of the risk-free asset reflects not only its absence of risk but also the fact that the asset's return is unaffected by movements in the market return.

On average, during the past 75 years, the return on long-term corporate bonds has exceeded the return on long-term government bonds.

Asset P has a beta of 0.9. The risk-free rate of return is 8 percent, while the return on the market portfolio of assets is 14 percent. The asset's required rate of return is

Assume your firm produces a good which has high sales when the economy is expanding and low sales during a recession. This firm's overall risk will be higher if it invests in another product which is counter cyclical.

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -Nico owns 100 shares of stock X which has a price of $12 per share and 200 shares of stock Y which has a price of $3 per share. What is the proportion of Nico's portfolio invested in stock X?

The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value.

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -The beta of the portfolio in Table 8.2, containing assets X, Y, and Z, is

On average, during the past 75 years, the return on large-company stocks has exceeded the return on small-company stocks.

As risk aversion increases

Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that

Business risk is the chance that the firm will be unable to cover its operating costs and is affected by a firm's revenue stability and the structure of its operating costs (fixed vs. variable).