Chapter 8 Risk And Return Capital Market Theory

Question 1

refers to the gain or loss
realized by an investment portfolio
containing several types of
investments.

Answer 1

Portfolio return

Question 2

a risk factor you can never eliminate, contributes to portfolio risk. This
includes the risk associated with interest rates, recession, war and political instability, all of which
can have significant repercussions for companies and their share prices.

Answer 2

SYSTEMIC RISK

Question 3

Also known as specific risk, it relates to the risk associated with owning the shares of a specific company in
your portfolio.

Answer 3

UNSYSTEMATIC RISK

Question 4

not putting all your eggs into one basket, is the primary method to reduce
specific risk within your portfolio.

Answer 4

DIVERSIFICATION

Question 5

A further way to improve
your portfolio diversification is to invest in other asset classes. Balanced mutual
funds invest a portion of the fund’s money across stocks, bonds and short-term cash investments such as treasury bills.

Answer 5

MORE THAN JUST STOCKS

Question 6

refers to the volatility of the portfolio which is calculated based on three
important factors that include the standard deviation of
each of the assets present in the total Portfolio.

Answer 6

Portfolio Standard Deviation

Question 7

Portfolio standard deviation is the respective weight of that :

Answer 7

individual asset in total portfolio and correlation between each pair of assets of the portfolio.

Question 8

Portfolio Standard Deviation is calculated based on the :

Answer 8

standard deviation of returns of each asset in the
portfolio, the proportion of each asset in the overall portfolio i.e., their respective weights in the total portfolio,
and also the correlation between each pair of assets in
the portfolio.

Question 9

It is a measure of the overall systematic risk of a portfolio of investments.

Answer 9

Portfolio beta

Question 10

Portfolio beta is equals the :

Answer 10

weighted-average of the beta coefficient of all the individual stocks in a portfolio.

Question 11

It is a model that describes the relationship between
the expected return and risk of
investing in a security
.

Answer 11

The Capital Asset Pricing Model (CAPM)

Question 12

The “Ra” notation represents this of a capital asset over
time, given all of the other variables in
the equation

Answer 12

EXPECTED RETURN

Question 13

This should correspond to
the country where the investment is
being made , and the maturity of the
bond should match the time horizon of
the investment.

Answer 13

RISK-FREE RATE

Question 14

It is a measure of a stock’s risk
(volatility of returns) reflected by
measuring the fluctuation of
its price changes relative to the overall market. In other words, it is the stock’s
sensitivity to market risk.

Answer 14

BETA

Question 15

This represents the additional return over and above the risk-free rate, which is required to compensate investors for investing in a riskier asset class.

Answer 15

The market risk premium

Question 16

This represents the additional return over and above the risk-free rate, which is required to compensate investors for investing in a riskier asset class.

Answer 16

The market risk premium