Chapter 6

Question 1

The rate of return earned on an investment that equals the dollar gain divided by the amount invested

Answer 1

Holding-Period Return (Realized Rate of Return)

Question 2

The arithmetic mean or average of all possible outcomes where those outcomes are weighted by the probability that each will occur

Answer 2

Expected Rate of Return

Question 3

Potential variability in future cash flows

Answer 3

Risk

Question 4

A statistical measure of the spread of a probability distribution

Answer 4

Standard Deviation

Question 5

The risk related to an investment return that cannot be eliminated through diversification and results from factors that affect all stocks

Answer 5

Systematic Risk

Question 6

The risk related to an investment return that can be eliminated through diversification and results from factors that are unique to a particular firm

Answer 6

Unsystematic Risk

Question 7

The line of “best fit” through a series of returns for a firm’s stock relative to the market’s returns

Answer 7

Characteristic Line

Question 8

The relationship between an investment’s returns and the market’s returns. This is the measure of the investment’s nondiversifiable risk

Answer 8

Beta

Question 9

The relationship between a portfolio’s returns and the market returns. Measure of the portfolio’s nondiversifiable risk

Answer 9

Portfolio Beta

Question 10

Identifying and selecting the asset classes appropriate for a specific investment portfolio and determining the proportions of those assets within the portfolio

Answer 10

Asset Allocation

Question 11

Minimum rate of return necessary to attract an investor to purchase or hold a security

Answer 11

Minimum Rate of Return

Question 12

The interest rates on short-term U.S. Government securities are commonly used to measure this rate

Answer 12

Risk-free Rate of Return

Question 13

The additional return expected for assuming risk

Answer 13

Risk Premium

Question 14

An equation stating that the expected rate of return on an investment is a function of the risk-free rate, the investment’s systematic risk, and the expected premium for the market portfolio of all risky securities

Answer 14

Capital Asset Pricing Model (CAPM)

Question 15

The return line that reflects the attitudes of investors regarding the minimum acceptable return for a given level of systematic risk associated with security

Answer 15

Security Markey Line