CH 8

Question 1

Portfolio

Answer 1

any combination of two or more assets held together

Question 2

Unsystematic Risk

Answer 2

AKA specific, unique, residual, and diversifiable risk. It is the uncertainty that comes from investing with a company or industry

Question 3

Systematic Risk

Answer 3

AKA market or undiversidiable risk. It is the uncertainty that comes from investing in the market

Question 4

Minimum Variance Portfolio

Answer 4

combination of two risky assets that provides the lowest possible risk level for the rate of expected return

Question 5

Efficient Portfolio

Answer 5

combination of assets that offers the highest expected return for a defined level of risk

Question 6

Efficient Frontier

Answer 6

The set of optimal portfolios that offers the highest expected return for a defined level of risk

Question 7

Systematic Risk Principle

Answer 7

in well-diversified portfolios, only the systematic risk matters and is related to the expected returns

Question 8

Beta

Answer 8

A measure of sysematic risk hjelf by a security or portfolio compared to the market

Question 9

Efficient Market Hypothesis

Answer 9

theory that assets always incorporate and reflect relevant information and beating the market is impossible

Question 10

Security Market Line

Answer 10

graphs the systematic risk verses the expected return of the market portfolio and the risk-free rate

Question 11

Capital Asset Pricing model

Answer 11

model that desribes the relationship between systematic risk and expected return

Question 12

Alpha

Answer 12

the risk-adjusted rate of return on a security over that predicted by the capital asset pricing model

Question 13

Limiting Assumption of the Capital Asset Pricing Model

Answer 13

1) individual investors do not have the ability to influence market prices.
2) Every investor is investing for a single (defined) period.
Investments are limited to those traded on efficient exchanges.
3) There are no taxes or transaction costs to influence investor choices.
4) All investors are rational and choose to construct portfolios using the efficient frontier.
5) When information is disseminated, every investor draws the same conclusions from that information.

Question 14

As more securities are included in a portfolio more what risk is reduced leaving what type of risk left?

Answer 14

Unsystematic risk leaving only systematic risk

Question 15

Systematic risk principle

Answer 15

states that investors are only rewarded for the level of systematic risk they bear

Question 16

beta coefficient is a measure of what?

Answer 16

systematic risk only

Question 17

The efficient market hypothesis is related to the capital assest pricing model in what way?

Answer 17

It predicts that the security market line represents the most efficient set of portfolio combinations for all investors based on the level of systematic risk they are willing to bear

Question 18

Efficient Market Hypothesis (EMH)

Answer 18

theory that assets always reflect relevant information and beating the market is impossible

Question 19

What does a high alpha mean?

Answer 19

a positive alpha means a security is paying a higher rate of return than is required for its risk

Question 20

What does a negative alpha mean?

Answer 20

overvalued and should be sold

Question 21

SML

Answer 21

Security Market Line- represents the possible portfoilo combination

Question 22

The slope of the SML is the formula for what

Answer 22

Capital Asset pricing model (CAPE)