ch. 6

Question 1

stand-alone basis

Answer 1

risk of an asset’s cash flow, risk is reduced through diversificiation

Question 2

expected return

Answer 2

mean value of its probability distribution of returns

Question 3

components of an asset’s risk

Answer 3

1. diversifiable risk: can be eliminated (aka stand-alone basis)
2. market risk: can’t be eliminated with diversification

Question 4

relevant risk of an individual asset

Answer 4

its contribution to the risk of a well-diversified portfolio.

Question 5

beta

Answer 5

meausres the extent to which the stock’s returns move relative to the market. AVG stock has beta = 1.0 (same as market portfolio)

Question 6

beta of a portfolio

Answer 6

weighted average of the betas of the individual securities in the portfolio

Question 7

Security Market Line

Answer 7

shows relation btwn a security’s market risk and required rate of return. `

Question 8

risk-free rate can change

Answer 8

bc of changes in real rates or expected inflation

Question 9

ways that a required rate of return can change

Answer 9

1. risk-free rate change
2. stock beta change
3. investor’s aversion to risk change

Question 10

CAPM basis

Answer 10

based on expected returns