Chapter 11 - Risk and Return

Question 1

the potential of losing something of value vs the potential of gaining something of value

Answer 1

Risk

Question 2

preventing a risk from being unfavorable

Answer 2

minimize risk

Question 3

once risks are unfavorable, keep it from getting worse

Answer 3

mitigate risks

Question 4

the return on a risky asset (stock) expected in the future

Answer 4

expected returns

Question 5

risk that influences a large number of assets

has market-wide effects

Answer 5

systematic risk

Question 6

also called non-diversifiable risk

Answer 6

systematic risk

Question 7

a risk that influences a small number of assets

is firm or industry specific

Answer 7

unsystematic risk

Question 8

also called diversifiable risk

Answer 8

unsystematic risk

Question 9

systematic risk + unsystematic risk = ?

Answer 9

total risk

Question 10

the expected return on a risky asset depends only on that asset’s (or that stock’s) systematic risk

Answer 10

Systematic Risk Principle

Question 11

spreading investments over a # of assets to eliminate unsystematic risk (but not systematic risk)

Answer 11

Principle of Diversification

Question 12

a group of assets held by an investor

Answer 12

Portfolio

Question 13

the amount of systematic risk present in a particular risky asset, relative to that of the average asset

Answer 13

Beta

Question 14

Levels of Risk in Beta:

Average Risk

Answer 14

1

Question 15

Levels of Risk in Beta:

Less than Average Risk

Answer 15

0-1

Question 16

Levels of Risk in Beta:

More than Average Risk

Answer 16

1+

Question 17

positively sloped line displaying the relationship between expected return and beta

Answer 17

Security Market Line (SML)