Exam 5: Risk and Portfolio Management

a. What is the expected return on a portfolio consisting of an equal amount invested in each stock? b. What is the expected return on the portfolio if 50 percent of the funds are invested in stock C, 30 percent in stock A, and 20 percent in Stock D?

What is the expected return on a stock that pays a 4 percent annual dividend and whose price is expected to appreciate annually at 6 percent?

Reinvestment rate risk results from higher stock prices in the future.

A portfolio consisting of securities whose returns are highly correlated is not truly diversified.

Beta coefficients 1. are a measure of systematic risk 2. relate the return on an individual security to the return on the market 3. measure the variability of as asset's return

Sources of risk include 1. fluctuating exchange rates 2. a firm's financing decisions 3. higher interest rates 4. loss of purchasing power

The "efficient frontier" relates all the combinations of risk and return that represent the same level of satisfaction.

The security market line does not

The informed investor can expect consistently to outperform the market.

While diversification decreases risk, it also increases the chance of a large gain.

The beta of a portfolio is a weighted average of each asset's beta coefficient.

Diversification reduces reinvestment rate risk.

Unsystematic risk is

Arbitrage pricing theory is a multi-variable model used to explain securities returns.

Unsystematic risk considers how firms finance their assets and the nature of their operations.

The negative relationship between interest rates and securities prices is the source of interest rate risk.

Beta coefficients of 1.3 indicate

Sources of risk to an investor include 1. loss when funds are reinvested at lower rates 2. fluctuations in securities markets 3. the financing decisions of the firm

Reinvestment rate risk refers to fluctuations in

A diversified portfolio requires the securities of at least fifty firms.