Exam 8: Risk and Return

Changes in risk aversion, and therefore shifts in the SML, result from changing tastes and preferences of investors, which generally result from various economic, political, and social events.

Champion Breweries must choose between two asset purchases. The annual rate of return and related probabilities given below summarize the firm's analysis. For each asset, compute (a) the expected rate of return. (b) the standard deviation of the expected return. (c) the coefficient of variation of the return. (d) Which asset should Champion select?

A beta coefficient of 0 represents an asset that ________.

The inclusion of assets from countries that are less sensitive to the U.S. business cycle reduces the portfolio's responsiveness to market movement and to foreign currency fluctuation.

A beta coefficient of -1 represents an asset that ________.

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

An increase in the Treasury Bill rate ________.

Uncorrelated assets have correlation coefficient close to zero.

Asset A was purchased six months ago for $25,000 and has generated $1,500 cash flow during that period. What is the asset's rate of return if it can be sold for $26,750 today?

In the capital asset pricing model, an increase in inflationary expectations will be reflected by ________.

An increase in the beta of a corporation, all else being the same, indicates ________.

The CAPM is based on an assumed efficient market in which there are many small investors, each having the same information and expectations with respect to securities; there are no restrictions on investment, no taxes, and no transactions costs; and all investors are rational, view securities similarly, and are risk-averse, preferring higher returns and lower risk.

The beta of a portfolio is a function of the standard deviations of the individual securities in the portfolio, the proportion of the portfolio invested in those securities, and the correlation between the returns of those securities.

Diversifiable risk is the relevant portion of risk attributable to market factors that affect all firms.

A change in inflationary expectations resulting from events such as international trade embargoes or major changes in Federal Reserve policy will result in a shift in the SML.

Given the following information about the two assets A and B, determine which asset is preferred.

The return on an asset is the change in its value plus any cash distribution over a given period of time, expressed as a percentage of its ending value.

Combining negatively correlated assets can reduce the overall variability of returns.

The correlation coefficient is an index of the degree of movement of an asset's return in response to a change in the risk-free asset return.

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.