Exam 8: Risk and Rates of Return

For Investment A, the probability of the return being 20.0% is 0.5, 10.0% is 0.4, and -10.0% is 0.1. Compute the standard deviation for the investment with the given information. (Round your answer to one decimal place.)

Risk refers to the chance that some unfavorable event will occur, and a probability distribution is completely described by a listing of the likelihood of unfavorable events.

For a risk averse investor, other things held constant, the higher a security's risk, the higher the return investors demand, and thus the less they are willing to pay for the investment.

Darren has the option of investing in either Stock A or Stock B. The probability of the return of Stock A being 25% is 0.45, 14% is 0.25, and 4% is 0.30. The probability of the return of Stock B being 30% is 0.30, 9% is 0.25, and 2% is 0.30. Given the probability distributions for the two investments, what is the expected rate of return for Stock A and Stock B?

Which of the following statements about the various types of risks is true?

Which of the following statements about diversification is correct?

The relevant risk, the risk for which investors should be compensated, is that portion of the total risk that cannot be diversified away.

Stock A's beta is 2.1. The risk-free rate is 6%, and the market return is 13%. The expected rate of return of Stock A is 15.5%. Based on the above information, which of the following statements is true?

A listing of all possible outcomes, or events, with a chance of occurrence assigned to each is called a probability distribution.

A portfolio would offer maximum diversification benefits when _____.

Which of the following pairs of risks have both the components referring to the same kind of risk?

The standard deviation is calculated as the weighted average of all the deviations from the expected value, and it indicates how far above or below the expected value the actual value is expected to be.

The expected returns for Stocks A, B, C, D, and E are 7%, 10%, 12%, 25%, and 18% respectively. The corresponding standard deviations for these stocks are 12%, 18%, 15%, 23%, and 15% respectively. Based on their coefficients of variation, which of the securities is least risky for an investor? Assume all investors are risk-averse and the investments will be held in isolation.

Dividing the standard deviation of the returns of a stock by the stock's expected return gives us the stock's _____.

Liquidity risk is an unsystematic risk and can be diversified by the investors.

The variance of the returns of Stock X is 62.5%, and the expected return from the stock is 18%. Calculate the coefficient of variation of the stock. (Round your answer to two decimal places.)

The chance of receiving an actual return that differs from the one that is expected is called _____.

The greater the variability of the possible returns on an investment, _____.

Diversifiable risk includes _____.

The expected rate of return of an investment _____.