Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
Chapter 11 Finance
| Risk is defined as uncertainty: | to refer to the variability of returns associated with a given asset |
| Risk is defined is the chance of suffering a financial loss | posibility that actual return might not equal expected return |
| what will we use to measure risk? | standard deviation and coefficient of variation |
| Concept for risk: | the greater the variability, the greater the risk |
| return: | total percentage gain or lost on an investment |
| Measuring Return: ex-ante | required return & actual return |
| measuring return: ex-post | actual return |
| cumulative return: | link monthly returns together. accounts for reinvesting (compounding) |
| expected return (ex-post) | historical returns. assumes that each scenario has the same probability. probability-weighted average return |
| measuring risk has what two conditions: | uncertainty, possibility that actual return does not equal expected return |
| risk = | variability |
| Risk does not just "You lost money!" it is... | how far away on average is each observation from the expected value.what is the st dev from the mean |
| Probability distribution: | return under different scenarios, probability of each scenario occuring |
| standard deviation: ex ante- | dispersion around the asset's expected return, measure absolute risk |
| coefficient of variation | measure of relative dispersion that is useful in comparing risks of assets with differing expected returns |
| risk aversion | seek higher return to compensate for higher risk |
| how is risk-return trade-off for a portfolio measured by? | the portfolio expected return and standard deviation (just as individual assets) |
| if we assume that all investors are rational and risk averse..... | that investor will always choose to invest in portfolios rather than in single assets |
| investors will hold portfolios because... | he or she will diversify away a portion of the risk that is inherent in "putting all your eggs in one basket" |
| the lowest coefficient of variation is.. | best! |
| Modern portfolio theory was who? | Markowitz |
| What was the old portfolio theory? | buy a bunch of stocks with low risk . this was bad because of railroad example. still diversified in companies, not industry. |
| diversification in finance is... | a risk mgmt technique that mixes a wide variety of investments within a portfolio to reduce risk |
| sample risks that can be reduced by diversification : | a single firm becoming insolvent, single industry suffering a lostt in value, changes in weather, oil prices, etc |
| Think about this... how does a change in oil prices impact your portfolio if you own exon? | would drop but if you also own stock in trucking company |
| diversification is enhanced depending upon... | the extent to which the returns on assets "move" together |
| movement of how returns move together (diversification) is known as... | correlation |
| if there is perfectly positive correlation: | no diversification |
| if perfectly negatively correlated: | eliminated all risk. rare. |
| on average the correlation coefficient for the monthly returns on 2 randomly stocks is about. | .3 |
| Unsystematic Risk | Random events. diversifiable, firm specific risk. |
| Systematic Risk: | Affects whole market. non-diversafiable, market risk (can't get rid of it) |
| you only get compensated for holding what kind of risk? | systematic, non diversafiable |
| more systematic risk.... | more required return |
| Capital Asset Pricing Model does what | how much market risk exists with any given stock. Model for required return on asset |
| what is used to measure systematic risk: | beta |
| Beta: | extent to which security return changes relative to market. measures NON DIVERSAFIABLE RISK |
| Market risk premium = | market return-risk free rate |
| required return on investment = | risk free rate + [beta for investment x market risk premium] |
| what does CAPM tell us? | Required return for an asset = the risk free return + the risk premium for that asset |
| the risk premium is composed of what two parts | market risk premium & beta |
| Market risk premium: | the return required for bearing the market's level of systematic risk |
| beta: | risk coefficient which measures the sensitivity of the particular stock's return to changes in market condistions |
| CAPM relies on... which means that... | historical data which means the betas may or may not actually reflect the future variability |
| CAPM assumes markets are.. | efficient |
| an efficient portfolio is one that.. | maximizes return for a given level of risk |
| The relevant portion of an asset's risk, attributable to market factors that affect all firms is called | systematic risk |
| unsystematic risk is not relevent because | it can be eliminated through diversification |
| in CAPM, the beta coefficient is a measure of | non diversifiable risk |
| How can investors reduce the risk associated with an investment portfolio without having to accept a lower expected return? | purchase a variety of securities (diversify) |
| Which of the following has a beta of zero? | risk free asset |
| The portion of an asset's risk that is attributable to firm-specific, random causes is called | unsystematic risk |
| higher betas mean..... | higher systematic risk which mean greater expected returns |
| Reward to Risk Ratio | Slope = (Expecteted Rate of Return - Risk Free Rate)/ Beta |
| What does the Reward to Risk ratio tell us? | there is a risk premium of #% per unit of systematic risk |
| what must be the same for all of the assets in the market? | reward to risk ratio |
| synonym for market risks ex) GDP, interest rates, inflation | systematic risk |
| what is a synonym for systematic risk? | nondiversifiable |
| can be eliminated by diversification | diversafiable |
| another world for diversafiable risk | unsystematic risk |
| systematic risk principle | reward for bearing risk depends on systematic risk of an investment. EXPECTED RETURN DEPENDS ONLY ON THAT ASSET'S SYSTEMATIC RISK |
| Which one of the following is the vertical intercept of the security market line? | risk free rate |
| an underpriced security will plot where on SML? | above the security market line |
| the expected return on a security depends on which of the following? | risk free rate of return and market rate of return |
| Which one of the following is the minimum required rate of return on a new investment that makes that investment attractive? | cost of capital |
| If a security plots to the right and below the security market line, then the security has ____ systematic risk than the market and is ____ | more, over priced |
| dividend yield= | dividend/price |
| capital gain yeild= | (new price-old price)/Old price |
| total percentage return | capital gain yeild + dividend yeild |
Created by:
cl579544