Exam 8: Risk and Return

________ is the chance of loss or the variability of returns associated with a given asset.

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

The risk of an asset can be measured by its variance, which is found by subtracting the worst outcome from the best outcome.

The standard deviation 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.

An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is

In the capital asset pricing model, an increase in inflationary expectations will be reflected by a(n)

Changes in risk aversion, and therefore shifts in the SML, result from changing tastes and preferences of investors, which generally result from various economic, political, and social events.

The real utility of the coefficient of variation is in comparing assets that have equal expected returns.

Unsystematic risk can be eliminated through diversification.

Combining negatively correlated assets can reduce the overall variability of returns.

A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.

The expected value and the standard deviation of returns for asset A is (See below.) Asset A

Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance.

If a person's required return decreases for an increase in risk, that person is said to be

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

Diversifiable risk is the relevant portion of risk attributable to market factors that affect all firms.

Greater risk aversion results in lower required returns for each level of risk, whereas a reduction in risk aversion would cause the required return for each level of risk to increase.

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -As randomly selected securities are combined to create a portfolio, the ________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is ________ risk, while that remaining is ________ risk.

If a person's required return does not change when risk increases, that person is said to be

Risk that affects all firms is called