P2B.1 RISK AND RETURN

Question 1

Coefficient of Variation - What’s the Equation and relationship of CV to risk?

Answer 1

Std. deviation of an asseT

÷

Expected return of the asset

Risk INCREASES as CV INCREASES

Question 2

What is Beta?

Answer 2

Systemic Risk (affects entire market, not just a company)

IF Beta >1 HIGHLY VOLATILE

IF Beta <1 LESS VOLATILE

IF Beta = 1 Both Market and company stock move in SAME direction

IF Beta = 0 no correlation btwn company stock and market

IF Beta < 0 Market and company move in OPPOSITE direction

Question 3

What measures are used to analyze individual security risk?

Answer 3

Expected rate of return

Standard deviation

Question 4

___________ and ___________ measure portfolio risk

Answer 4

Covariance

Correlation

Question 5

TRUE/FALSE: Covariance > 0 indicates stocks moving in SAME direction

Answer 5

TRUE

Question 6

Covariance < 0 means that investments will move in ______ direction

Answer 6

OPPOSITE

Question 7

When stocks move in SAME direction, they’ll have a _____ covariance and a _____ correlation

Answer 7

POSITIVE, POSITIVE

Question 8

CAPM

Answer 8

R = RF + β(RM − RF )

Question 9

What is Risk Premium in the CAPM?

Answer 9

Market Risk - Risk-free rate

R_M − R_F

Question 10

Definition: Conservative Working Capital

Answer 10

Majority of a firm’s working capital will be in CURRENT ASSETS and have a small % in short-term financing

Question 11

Beta Coefficient is impacted by the following:

Answer 11

• debt-to-equity ratio
• industry characteristics
• operating leverage