SU 4: Investment Risk & Portfolio Mgmt

Question 0

Rate of Return

Answer 0

Return on investment/Amount invested

Question 1

Return on Investment

Answer 1

Amount received - Amount invested

Question 2

Expected Rate of Return

Answer 2

Possible rate of return x Probability

Question 3

Standard Deviation

Answer 3

The greater the SD of the expected return, the riskier the investment. The range of possible returns is wide.

Question 4

Standard Deviation (Calc)

Answer 4

Square root of (Possible rate of return - Expected rate of return)squared x Probability

Question 5

Coefficient of Variation

Answer 5

Standard deviation/Expected rate of return

Question 6

Covariance of a Two-Stock Portfolio

Answer 6

Correlation coefficient x Standard deviation x Standard deviation(2)

Question 7

Covariance

Answer 7

A measure of the mutual volatility of two securities.

Question 8

Beta Coefficient

Answer 8

Covariance of the returns on the market and on the security/Variance of the return on the market

Question 9

CAPM Required rate of Return

Answer 9

Risk-free rate + Beta(Market return - Risk-free rate