Chapter 11: Introduction to Risk, Return, and the Opportunity Cost of Capital

Question 1

market index

Answer 1

measure of the investment performance of the overall market

Question 2

S&P/TSX composite index

Answer 2

index of the investment performance of a portfolio of the major stocks listed on the Toronto stock exchange

Question 3

S&P/TSX composite total return index (TSXT)

Answer 3

measure of the composite index based on the prices plus dividends paid by the stocks in the S&P/TSX composite index

Question 4

Dow Jones industrial average

Answer 4

U.S. index of the investment performance of a portfolio of a portfolio of 30 “blue-chip” stocks

Question 5

Standard & Poor’s composite index/S&P 500

Answer 5

U.S. index of the investment performance of a portfolio of 500 large stocks

Question 6

maturity premium

Answer 6

extra average return from investing in long-term bonds versus short-term Treasury securities

Question 7

risk premium

Answer 7

expected return in excess of risk-free return as compensation for risk

Question 8

variance

Answer 8

average value of squared deviations from mean; a measure of volatility

Question 9

standard deviation

Answer 9

square root of variance; another measure of volatility

Question 10

diversification

Answer 10

strategy designed to reduce risk by spreading the portfolio across many investments

Question 11

correlation coefficient

Answer 11

measure of how closely two variables move together

Question 12

unique risk (specific risk/diversifiable risk)

Answer 12

risk factors affecting only the particular firm

Question 13

market risk (systematic risk)

Answer 13

economy-wide (macroeconomic) sources of risk that affect the overall stock market