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Exam 8: Risk and Return

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Question 71

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Because any investor can create a portfolio of assets that will eliminate all, or virtually all, nondiversifiable risk, the only relevant risk is diversifiable risk.

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Question 72

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In general, the lower (less positive and more negative) the correlation between asset returns,

A) the less the potential diversification of risk.
B) the greater the potential diversification of risk.
C) the lower the potential profit.
D) the less the assets have to be monitored.

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Question 73

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A normal probability distribution is an asymmetrical distribution whose shape resembles a pyramid.

Two assets whose returns move in the opposite directions and have a correlation coefficient of -1 are both either risk-free assets or low-risk assets.

Combining two negatively correlated assets to reduce risk is known as

Risk aversion is the behavior exhibited by managers who require a (n) ________.

The larger the difference between an asset's worst outcome from its best outcome, the higher the risk of the asset.

________ is the chance of loss or the variability of returns associated with a given asset.

The coefficient of variation is a measure of relative dispersion that is useful in comparing the risks of assets with different expected returns.

In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by

An efficient portfolio is one that

What is the expected risk-free rate of return if asset X, with a beta of 1.5, has an expected return of 20 percent, and the expected market return is 15 percent?

Total security risk is the sum of a security's nondiversifiable, diversifiable, systematic, and unsystematic risk.

Tim purchased a bounce house one year ago for $6,500. During the year it generated $4,000 in cash flow. If Time sells the bounce house today, he could receive $6,100 for it. What would be his rate of return under these conditions?

The ________ of an asset is the change in value plus any cash distributions expressed as a percentage of the initial price or amount invested.

Akai has a portfolio of three assets. Find the expected rate of return for the portfolio assuming he invests 50 percent of its money in asset A with 10 percent rate of return, 30 percent in asset B with a rate of return of 20 percent, and the rest in asset C with 30 percent rate of return.

A portfolio combining two assets whose returns are less than perfectly positive correlated can increase total risk to a level above that of either of the components.

The expected value and the standard deviation of returns for asset A is ________. (See table below.) Asset A

In no case will creating portfolios of assets result in greater risk than that of the riskiest asset included in the portfolio.

________ probability distribution shows all possible outcomes and associated probabilities for a given event.