Chapter 8

Question 1

the chance that an outcome other than the expected one will occur

Answer 1

Risk

Question 2

a listing of all possible outcomes or events, with a probability assigned to each outcome.

Answer 2

Probability distribution

Question 3

the rate of return expected to be realized from an investment, which is the mean value of the probability distribution of possible results.

Answer 3

Expected rate of return

Question 4

a measure of the tightness or variability of a set of outcomes.

Answer 4

Standard deviation

Question 5

a standardized measure of the risk per unit of returns. its calculated by dividing the standard deviation by the expected return.

Answer 5

Coefficient of variation

Question 6

risk averse investors require higher rates of return to invest in higher risk securities.

Answer 6

Risk aversion

Question 7

the portion of the expected return that can be attributed to the additional risk of an investment. It is the difference between the expected rate of return on a given risky asset and the expected rate of return on a less risky asset.

Answer 7

Risk premium

Question 8

the weighted average o the expected returns on stocks held in a portfolio.

Answer 8

Expected return on a portfolio

Question 9

the return that is actually earned.

Answer 9

Realized rate of return

Question 10

reduction of stand alone risk of an individual investment combining it with other investments in a portfolio.

Answer 10

Diversification

Question 11

a measure of the degree of relationship between two variables.

Answer 11

Correlation coefficient

Question 12

the part of a security’s risk associated with random outcomes generated by events or behaviors, specific to the firm.

Answer 12

Firm specific risk

Question 13

the part of a security’s risk associated with economic or market factors that systematically affect all firms to some extent.

Answer 13

Market risk

Question 14

the portion of a security’s risk that cannot be diversified away.

Answer 14

Relevant risk

Question 15

a measure of the extent of which the returns on a given stock move with the stock market.

Answer 15

Beta coefficient

Question 16

a model used to determine the required return on an asset which is based on the proposition that an assets return should be equal to the risk free return plus a risk premium that reflects the assets nondiversifiable risk.

Answer 16

Capital asset pricing model

Question 17

the line that shows the relationship between risk as measured by beta and the required rate of return for individual securities.

Answer 17

Security market line

Question 18

the additional return over the risk free rate needed to compensate investors for assuming average amount of risk.

Answer 18

Market risk premium

Question 19

the condition under which the expected return on a security is just equal to its required return (and the price is stable).

Answer 19

Equilibrium