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FIN 307 > Exam 2 - Chapter 7 [SLIDES] > Flashcards

Exam 2 - Chapter 7 [SLIDES] Flashcards

1
Q

However, I cannot tell you anything yet for individual asset even if you tell me the STD of the individual asset. Why?

A

Since it has diversified able risk

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2
Q

Decomposition risk

- decompose in 2 risk:

A
  1. Non diversified

2. Diversified

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3
Q

Now we know every investor holds the market portfolio M in equilibrium. Thus, not one takes any __________ ____

A

Diversifiable

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4
Q

However, STD’s of individual risky assets contain ______ _________

A

Diversifiable risk

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5
Q

Any pairs of risky is ______ correlated

A

Positively

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6
Q

Diversification effect exists -> each individual risky asset must be subject to a ________ ________

A

Diversifiable risk

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7
Q

The two conditions that has to be satisfied for empirical results

A
  1. Any pari of risky assets is postieively correlated

2. Diversification effects exists each individual risky asset must be subject to diversifiable risk

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8
Q

Unsystematic risk is what type of ris k

A

Diversifiable risk

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9
Q

What is systemic risk

What type of risk

A

Non diversified risk

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10
Q

Equilibrium (one major assumption) (learn all this)

A

Homogenous

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11
Q

Limitation of cml line

A

Combines a diversified portfolio

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12
Q

Another names for systematic risk

A

Non-diversifiable risk

Market risk

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13
Q

Systematic/non-diversifiable/market risk:

A

Risk related to the systematic or macro economic factors

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14
Q

Unsystematic/diversifiable/unique/firm specific risk:

A

Risk not related to the macro factor or market index

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15
Q

Another name for unsystematic risk

A

Diversifiable/unique/firm specific risk

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16
Q

No one takes _______ risk in equilibrium

A

Unsystematic risk

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17
Q

You want the equilibrium return because:

A

To know future cash flows and the price of the stock

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18
Q

Market portfolio beta

A

1

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19
Q

Equilbirium relationship between

A

Return and risk in terms of beta for any asset or portfolio

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20
Q

Only what type of risk matters

A

Systematic risk

21
Q

Systematic risk is used for what

A

Expected rate of return

22
Q

Expect return on asset i =

A

Risk free rate + risk premium

23
Q

Risk premium on asset i =

A

Market risk premium x beta

24
Q

Beta of market portfolio =

A

1

25
Q

Beta of risk-free asset =

A

0

26
Q

Beta

A

Beta is a measure of non-diversifiable risk relative to market portfolio risk

27
Q

Alpha must be ____ if the model is correct and the market is in equilibrium

A

0

28
Q

If the regression results shows non-zero alpha value, the data indicates that the asset exhibited _______ during the data period

A

Mispriced

29
Q

If alpha is higher, we get a higher ________ ________ because _____ is higher

A

Sharpe ratio; u (expected return)

30
Q

You want a ______ Sharpe Ratio

A

Higher

31
Q

If you are an investor you’re looking for a positive or negative alpha ?

A

Positive alpha

32
Q

Positive alpha is _______

A

Underpriced

33
Q

Negative alpha price is ______

A

Overpriced

34
Q

If you want a positive alpha you want a _____ price

A

Lower

35
Q

You need same _______ for CAPM Model

A

Horizons

36
Q

The CAPM is “false” based on the _____________

A

Validity of its assumptions

37
Q

THE CAPM could still be a useful predictor of ________ ________

A 
Expected returns 
(Empirical returns)
38
Q

(CAPM) there may be a huge measurably issue because the market portfolio is ________

A

Unobservable

39
Q

(CAPM) ______ may not. Be constant over time

A

Beta

40
Q

As a theory the CAPM is _______

A

Untestable

41
Q

However, the _______ of the CAPM is testable

A

Practicality

42
Q

Even if the CAPM is “False” the markets can still be “_______”

A

Efficient

43
Q

Therefore the CAPM is _____ and _____ understood

A

Used and well

44
Q

The ______ we learn from the CAPM are still entirely valid

A

Principles

45
Q

Investors should ______

A

Diversify

46
Q

Systematic risk is the risk that _____

A

Matters

47
Q

A well diversified risky portfolio can be suitable for

A

a wide range of investors

48
Q

Difference in risk tolerances can be handled by changing the ______ _____ decisions in the complete portfolio

A

Asset allocation

49
Q

Single pricing model is to measure ______

A

Systematic risk

FIN 307 (26 decks)

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