Exam 8: Risk and Return

Diversified investors should be concerned solely with nondiversifiable risk because it can create a portfolio of assets that will eliminate all, or virtually all, diversifiable risk.

If a manager prefers a higher return investment regardless of its risk, then he is following a ________ strategy.

The ________ of a given outcome is its chance of occurring.

Beta coefficient is an index that measures the degree of movement of an asset's return in response to a change in the market return.

Which asset would the risk-averse financial manager prefer? (See below.)

A(n) ________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, everything else remaining the same.

An investment advisor has recommended a $50,000 portfolio containing assets R, J, and K; $25,000 will be invested in asset R, with an expected annual return of 12 percent; $10,000 will be invested in asset J, with an expected annual return of 18 percent; and $15,000 will be invested in asset K, with an expected annual return of 8 percent. The expected annual return of this portfolio is ________.

Stocks are less riskier than either bonds or bills.

In U.S., during the past 75 years, on an average the return on large-company stocks has exceeded the return on small-company stocks.

Unsystematic risk can be eliminated through diversification.

The range of an asset's risk is found by subtracting the worst outcome from the best outcome.

The term "risk" is used interchangeably with "uncertainty" to refer to the variability of returns associated with a given asset.

The total rate of return on an investment over a given period of time is calculated by ________.

In the capital asset pricing model, the beta coefficient is a measure of ________.

In U.S., during the past 75 years, on an average the return on small-company stocks has levelled the return on large-company stocks.

Standard deviation is a measure of relative dispersion that is useful in comparing the risks of assets with different expected returns.

Table 8.1 -If you were to create a portfolio designed to reduce risk by investing equal proportions in each of two different assets, which portfolio would you recommend? (See Table 8.1)

Dr. Dan is considering investment in a project with beta coefficient of 1.75. What would you recommend him to do if this investment has an 11.5 percent rate of return, risk-free rate is 5.5 percent, and the rate of return on the market portfolio of assets is 8.5 percent?

Tangshan China's stock is currently selling for $160.00 per share and the firm's dividends are expected to grow at 5 percent indefinitely. In addition, Tangshan China's most recent dividend was $5.50. The expected risk free rate of return is 3 percent, the expected market return is 8 percent, and Tangshan has a beta of 1.20. (a) What is the expected return based on the dividend valuation model? (b) What is the required return based on the CAPM? (c) Would Tangshan China be a good investment at this time? Explain

Risk that affects all firms is called ________.