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BUSI 317 > Chapter 5 Terms > Flashcards

Chapter 5 Terms Flashcards

1
Q

Growth-Oriented Portfolio

A

primary objective is long-term price appreciation

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2
Q

Income-Oriented Portfolio

A

primary objective is to produce regular dividend and interest income

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3
Q

Positively Correlated

A

move in the same direction

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4
Q

Negatively Correlated

A

move in opposite directions

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5
Q

Advantages of International Diversification

A
  • Broader investment choices
  • Potentially greater returns than in U.S.
  • Reduction of overall portfolio risk
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6
Q

Disadvantages of International Diversification

A
  • Currency exchange risk
  • Less convenient to invest than U.S. stocks
  • More expensive to invest
  • Riskier than investing in U.S.
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7
Q

Diversifiable (Unsystematic) Risk

A
  • Results from uncontrollable or random events that are firm-specific
  • Can be eliminated through diversification
  • Examples: labor strikes, lawsuits
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8
Q

Nondiversifiable (Systematic) Risk

A
  • Attributable to forces that affect all similar investments
  • Cannot be eliminated through diversification
  • Examples: war, inflation, political events
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9
Q

Stocks with betas greater than 1.00 are …

A

more risky than the overall market

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10
Q

Stocks with betas less than 1.00 are …

A

less risky than the overall market

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11
Q

The beta for the market is …

A

1.00

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12
Q

What is beta?

A
  • A measure of nondiversifiable risk
  • Indicates how the price of a security responds to market forces
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13
Q

Higher stock betas should result in …

A

higher expected returns due to greater risk

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14
Q

If the market is expected to increase 10%, a stock with a beta of 1.50 is expected to increase …

A

15%

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15
Q

What is Capital Asset Pricing Model (CAPM)

A

Model that links the notions of risk and return

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16
Q

Traditional approach

A

Uses a broad range of industries to diversify the portfolio

17
Q

Modern Portfolio Theory (MPT)

A

Emphasizes statistical measures to develop a portfolio plan

18
Q

Efficient Frontier

A

The best balance between risk and return in a group of portfolios.

19
Q

Portfolios that fall to the right of the efficient frontier are …

A

not desirable because their risk return tradeoffs are inferior

20
Q

Portfolios that fall to the left of the efficient frontier are

A

not available for investments

21
Q

Portfolio Beta

A

The beta of a portfolio; calculated as the weighted average of the betas of the individual assets the portfolio includes

22
Q

nondiversifiable risk

A

provides a positive risk-return relationship

23
Q

Low-beta portfolios are …

A

are less responsive and less risky than high-beta portfolios.

BUSI 317 (9 decks)

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