Exam 8: Risk and Return

Investors should recognize that betas are calculated using historical data and that past performance relative to the market average may not accurately predict future performance.

Given the returns of two stocks J and K in the table below over the next 4 years. Find the expected return and standard deviation of holding a portfolio of 40% of stock J and 60% in stock K over the next 4 years:

Table 8.1 -The correlation of returns between Asset A and Asset B can be characterized as ________. (See Table 8.1)

The simplest type of probability distribution is a ________.

The security market line is not stable over time and shifts over time in response to changing inflationary expectations.

In the most basic sense, risk is a measure of the uncertainty surrounding the return that an investment will earn.

The steeper the slope of the security market line, the greater the degree of risk aversion.

Nico bought 100 shares of a company's stock for $22.00 per share on January 1, 2013. He received a dividend of $2.00 per share at the end of 2013 and $3.00 per share at the end of 2014. At the end of 2015, Nico collected a dividend of $4.00 per share and sold his stock for $18.00 per share. What was Nico's realized holding period return? What was Nico's compound annual rate of return? Explain the difference?

The more certain the return from an asset, the less variability and therefore the less risk.

Most managers are risk-averse, since for a given increase in risk they require an increase in return.

Combining two assets having perfectly negatively correlated returns will result in the creation of a portfolio with an overall risk that ________.

When the U.S. currency gains in value, the dollar value of a foreign-currency-denominated portfolio of assets decline.

Coefficient of variation is a measure of relative dispersion used in comparing the risks of assets with differing expected return.

On average in U.S., during the past 75 years, the return on U.S. Treasury bills has exceeded the return on long-term government bonds.

Asset P has a beta of 0.9. The risk-free rate of return is 8 percent, while the return on the market portfolio of assets is 14 percent. The asset's required rate of return is ________.

An investment's total return is the sum of any cash distributions minus the change in the investment's value, divided by the beginning-of-period value.

The higher an asset's beta, ________.

Risk aversion is the behavior exhibited by managers who require ________.

If you expect the market to increase which of the following portfolios should you purchase?

An efficient portfolio is defined as ________.