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FIN 330 > Chapter 8 > Flashcards

Chapter 8 Flashcards

1
Q

a collection or group of assets

A

portfolio

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2
Q

measure of uncertainty surrounding the return that an investment will earn, or more formally, the variability of returns associated with a given asset.

A

risk

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3
Q

total gain or loss experienced on an investment over a period of time; calculated by dividing the asset’s cash distributions during the period, plus change in value, by its beginning-of-period investment value.

A

total rate of return

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4
Q

_____ has maturities of 1 year or less, while ___ has maturities ranging up to 30 years.

A

bills, bonds

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5
Q

three different categories of risk:

A

risk aversion, risk neutrality, risk seeking.

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6
Q

the attitude toward risk in which investors require an increased return in compensation for an increase in risk.

A

risk aversion

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7
Q

the attitude toward risk in which investors choose the investment with the higher return regardless of risk.

A

risk neutrality.

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8
Q

attitude toward risk in which investors prefer investments with greater risk even if they have lower expected returns.

A

risk seeking

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9
Q

approach for assessing risk that uses several possible alternative outcomes to obtain a sense of variability among returns.

A

scenario analysis

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10
Q

Measure of an assets risk, which is found by subtracting the return associated with the pessimistic (worst) outcome from the return associated with the optimistic (best) outcome.

A

Range

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11
Q

Three different outcomes expected with range: pessimistic, __________ and optimistic

A

Most likely

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12
Q

The chance that a given outcome will occur.

A

Probability.

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13
Q

Model that relates probabilities to the associated outcomes.

A

Probability distribution

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14
Q

Simplest type of probability distribution is the

A

Bar chart

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15
Q

A probability distribution showing all the possible outcomes and associated probabilities for a given event.

A

Continuous probability distribution

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16
Q

Most common statistical indicator of an assets risk; measures the dispersion around the expected value.

A

Standard deviation.

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17
Q

Average return that an investment is expected to produce over time.

A

Expected value of a return.

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18
Q

Investments with higher returns have higher

A

Standard deviations.

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19
Q

Higher standard deviations are associated with ____ risk, which confirms a positive correlation between risk and return. This correlation reflects risk aversion by market participants.

A

Greater

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20
Q

Symmetrical probability distribution whose shape resembles a bell shaped curve.

A

Normal probability distribution.

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21
Q

___% of possible outcomes will lie between 1 standard deviation, ___% will lie between 2 standard deviations from expected return, and ___% between 3 standard deviations.

A

68, 95, 99

22
Q

Measure of relative dispersion that is useful in comparing the risks of assets with differing expected returns.

A

Coefficient of variation.

23
Q

Portfolio that maximizes return for a greater level of risk, or minimizes risk for a given level of return.

A

Efficient portfolio

24
Q

Underlies the process of diversification that is used to develop an efficient portfolio.

A

Correlation.

25
Q

Weighted average of the returns on the individual assets from which it is formed.

A

Return on a portfolio

26
Q

Statistical measure of the relationship between any two series of numbers.

A

Correlation

27
Q

Describes two series that move in the same direction.

A

Positive correlation

28
Q

Describes two series that move in opposite directions.

A

Negative correlation

29
Q

Measure of the degree of correlation between two series.

A

Correlation coefficient

30
Q

Describes two positively correlated series that have a correlation coefficient from +1

A

Perfectly positively correlated

31
Q

Describes two negatively correlated series that have a correlation coefficient of -1.

A

Perfectly negatively correlated

32
Q

To reduce overall risk, if is best to ______ by combining or adding to the portfolio, assets that have lowest possible correlation. Combining assets that have a low correlation with each other can reduce the overall variability of a portfolios return.

A

Diversifying

33
Q

Describes twos Erie’s that lack any interaction and therefore have a correlation coefficient close to zero.

A

Uncorrelated

34
Q

In general, the lower the correlation between asset returns, the ___ the risk reduction that investors can achieve by diversifying.

A

Greater

35
Q

Over long periods, _____ diversified portfolios tend to perform better than _____ portfolios.

A

International, domestic.

36
Q

Risk that arises from the possibility that a host government will take actions harmful to foreign investors or that political turmoil will endanger investments.

A

Political risk

37
Q

Basic theory that links risk and return for all assets.

A

Capital asset pricing model (CAPM)

38
Q

Combination of a security’s non diversifiable risk and diversifiable risk.

A

Total risk

39
Q

Portion of an assets risk that is attributable to firm specific, random causes; can be eliminated through diversification. Also called unsystematic risk.

A

Diversifiable risk.

40
Q

Relevant portion of an assets risk attributable to market factors that affect all firms; cannot be eliminated through diversification. Also called systematic risk.

A

Nondiversifiable risk

41
Q

The only relevant risk is

A

Nondiversifiable risk is systematic risk

42
Q

Relative measure of nondiversifiable risk. degree of movement of an assets return in response to a change in the market return.

A

Beta coefficient.

43
Q

The return on the market portfolio of all traded securities.

A

Market return.

44
Q

The beta coefficient for the entire market equals

A

1

45
Q

The required return on a risk free asset, typically a 3 month US treasury bill.

A

Risk free rate of return.

46
Q

Short term IOU’s issued by the US treasury; considered the risk free asset.

A

Treasury bills (T-bills)

47
Q

The depiction of the capital asset pricing model as a graph that reflects the required return in the marketplace for each level of nondiversifiable risk (beta)

A

Security market line (SML)

48
Q

When beta < 1, it is

A

Less risky than the market

49
Q

When b > 1, it is

A

Riskier than the market

50
Q

When b=0, it is

A

Not related to market/risk free

FIN 330 (6 decks)

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