Topic 9- Risk and Return

Question 1

Single asset or portfolio when it comes to returns…

Answer 1

single asset returns are more volatile than that of a portfolio

Question 2

a portfolio is

Answer 2

a collection of assets

Question 3

in a portfolio the weight of an asset determines…

Answer 3

how the asset contributes to the overall return

Question 4

the return of a portfolio formula

Answer 4

sum of weight x return

Question 5

the expected return of a portfolio

Answer 5

sum of: prob x return

Question 6

std formula

Answer 6

square root of: sum of: prob x (return-expected return)^2

Question 7

the std of a portfolio is the …

Answer 7

spread of returns about the expected return

Question 8

std of a portfolio measures

Answer 8

the systematic + firm risk (total risk) for a stock

Question 9

Total risk is

Answer 9

std

Question 10

Systematic risk is

Answer 10

Beta

Question 11

Diversification

Answer 11

means investing is more than 2 risky assets whose values don’t move in same direction at same time

Question 12

if you have diversification combining risky assets into a portfolio risk is

Answer 12

offset due to the low correlations

Question 13

diversification can be either

Answer 13

within 1 asset class (stocks but diff industries) or spread across classes (stocks, bonds…)

Question 14

as you increase the number of stocks the std

Answer 14

decreases, but never approaches 0

Question 15

2 types of risk

Answer 15

firm-specific risk/ unsystematic risk/ diversifiable risk
systematic risk/market risk/ non-diversifiable

Question 16

firm specific /unsystematic risk/ diversifiable risk

Answer 16

unique risk to individual asset

Question 17

which risk can be diversified away?

Answer 17

firm specific /unsystematic risk/ diversifiable risk

Question 18

which risk are you compensated for?

Answer 18

systematic only

Question 19

systematic risk is driven by

Answer 19

changes of macroeconomic factors

Question 20

systematic risk measures the relationship between

Answer 20

returns of individual assets and returns of the most diversified portfolio (mafrket portfolio)

Question 21

the expected return is the av of

Answer 21

probability of distribution of possible returns

Question 22

the unexpected return is

Answer 22

driven by risk and the portion of inventory gain or loss due to unforseen circumstances

Question 23

Beta

Answer 23

measure of systematic risk (non-diversifiable/market risk)

Question 24

Beta is a measure of co….

Answer 24

covariance of stock with returns of a portfolio

Question 25

The required return will be a

Answer 25

linear function of its beta

Question 26

Expected return (inc rf rate)

Answer 26

= rf + (B(E(p)-rf))

Question 27

Beta>1

Answer 27

above average risk

Question 28

Beta=1

Answer 28

Average risk

Question 29

Beta<1

Answer 29

Below average risk

Question 30

Beta=0

Answer 30

riskless investment

Question 31

Beta equation

Answer 31

weight x Bi

Question 32

Beta is the slope of

Answer 32

the return of market index vs return for a stock

Question 33

increased B means Increased

Answer 33

return

Question 34

CAPM is

Answer 34

capital asset pricing model

Question 35

CAPM eq

Answer 35

=rf+(B((E(rm)-rf))

Question 36

in the CAPM equation which part is the market risk premium

Answer 36

(E(r)-rf)

Question 37

in the CAPM equation which part is the risk premium

Answer 37

(B((E(r)-rf))

Question 38

what is plotted on the security market line

Answer 38

expected return vs B

Question 39

what does it tell us if assets and portfolios are not plotted on the security line?

Answer 39

the info of mispricing will be taken advantage of that they are over or underpriced

Question 40

What is an appropriate return for an asset with no systematic risk?

Answer 40

risk free rate

Question 41

The CAPM helps us as it tells us what .... will require from an investment with particular ....

Answer 41

rate of return systematic risk

Question 42

How do you work out the expected return for a single stock?

Answer 42

(pboom x S1(r)boom)+(bust x S1(r)bust)

Question 43

How do you work out the portfolio's expected return?

Answer 43

return (boom)= (ws1xr boom s1) +(ws2xr booms 2 return (bust)= same but for busts expected return (p)= (p boom x r boom)+ (p bust x r bust)

Question 44

The std (risk) of small stocks vs large stocks and then corp bonds vs treasury bills

Answer 44

small > large (because more risk) corp > treasury

Question 45

An increased variability means increased std means increased

Answer 45

return

Question 46

stocks generally in the long run have a ....... than bonds

Answer 46

higher return than bonds

Question 47

rational investors are against... in investment values

Answer 47

fluctuations (measured by volatility)

Question 48

higher volatility means

Answer 48

higher return

Question 49

investors need higher r in higher volatile investments since they do or don't like risk

Answer 49

don't like risk

Question 50

if stock A is more volatile than stock but the arithmetic average is the same which stock will have a lower geometric average

Answer 50

A