Risk and Return Flashcards
It is the measure of the spread of the outcomes around the expected value. The greater the dispersion, the greater the risk.
Standard Deviation = √ Variance
Returns from shares of stocks
Dividends
Expected gain from an investment
Return
Returns from savings account, time deposit, special savings deposit, treasury bills, etc.
Interest
Returns from bonds
Coupon rate
Returns from shares of stocks
Dividends
In practice, returns are expressed in __________ figures. This allows investors to compare the rates of return on various assets of different levels of investment
Percentage
The chance that the actual return from investment differs from what is expected
Risk
The return that investors require for allowing others to use their money for a given time period.
The real rate of return
Inflation is the general increase in prices of goods and services, and reduces the purchasing power of the dollar. Deflation is the opposite, but generally happens only for short periods of time — most of the time, inflation prevails.
The _____________________ factor must be added to the real rate of return. Thus it is called the risk-free required rate of return.
Anticipated Inflation Factor
The ____________ will be different for each investment. For an insured deposit at a bank or a Treasury bill, the ____________ approaches to zero. All the return to the investor will be at risk-free rate of return (real rate of return + inflationary expectations). For common stock, the investor’s required return may carry a ____________ in addition to the risk-free rate of return.
All other investments pay a higher rate to compensate investors for the greater risk of default, or loss of capital. So investors demand a required return that is equal to the risk-free rate plus the amount necessary to compensate investors for the increased risk — the ____________.
Risk Premium
[Sources of Risk] Some things influence all stocks (political news; inflation; interest rates; war; etc.)
Market Risk
[Sources of Risk] Some things influence only particular firms (earnings reports; unexpected death of key executive; etc.)
Business-specific Risk
[TRUE OR FALSE] To reduce (but not eliminate) risk in a portfolio, the stocks within the portfolio must be from the same industry.
False: the stocks within the portfolio must be from fundamentally different industries
If we add a stock to the portfolio which has returns perfectly positively correlated with the portfolio, it will generally
a. add risk to the diversified portfolio
b. decrease the risk of the portfolio
a. add risk to the diversified portfolio
