Mod 14

Question 1

Beta coefficient

Answer 1

Measure of volatility or systematic risk of a security or portfolio in comparison to the market as a whole

Question 2

Capital asset pricing model

Answer 2

Equation of the security market line showing the relationship between expected return and beta

Question 3

Cost of capital

Answer 3

Min required rate of return on an investment

Question 4

Diversifiable risk

Answer 4

Also called asset specific

Risk that is unique to an asset

It can be reduced by holding a portfolio or assets that are uncorrelated

Question 5

Diversification

Answer 5

Process of spreading investments across more than 1 asset

Reduces systematic risk by investing in a variety of assets

Question 6

Expected return

Answer 6

Average return investors expect to receive if they hold an asset for many periods in which there are uncertain events

Question 7

Nondiversifiable risk

Answer 7

Min level of risk that can be achieved through holding a diversified portfolio

Market risk

Question 8

Portfolio

Answer 8

Collection of assets held by a person or organization as an investment

Question 9

Risk averse

Answer 9

When individuals want to avoid risk unless adequately compensated for it

Question 10

Risk premium

Answer 10

Excess return from an investment in a risky asset over that required from a risk free investment

Question 11

Security market line

Answer 11

Positively sloped straight line displaying the relationship between expected return and beta

Question 12

Systematic risk

Answer 12

Risk that influences a large # of assets

Market risk

Question 13

Systematic risk principle

Answer 13

Expected return on a risky asset depends on only that asset’s systematic risk

Question 14

Unsystematic risk

Answer 14

Risk that affects at most a small # of assets

Asset specific risk