Exam 8: Risk and Return

Investment A guarantees its holder $100 return. Investment B earns $0 or $200 with equal chances over the same period. Both investments have equal risk.

Tim purchased a bounce house one year ago for $6,500. During the year it generated $4,000 in cash flow. If Time sells the bounce house today, he could receive $6,100 for it. What would be his rate of return under these conditions?

Combining uncorrelated assets can reduce risk-not as effectively as combining negatively correlated assets, but more effectively than combining positively correlated assets.

An investment banker has recommended a $100,000 portfolio containing assets B, D, and F. $20,000 will be invested in asset B, with a beta of 1.5; $50,000 will be invested in asset D, with a beta of 2.0; and $30,000 will be invested in asset F, with a beta of 0.5. The beta of the portfolio is ________.

Total security risk is the sum of a security's nondiversifiable and diversifiable risk.

The value of zero for beta coefficient of the risk-free asset reflects not only its absence of risk but also the fact that the asset's return is unaffected by movements in the market return.

Lower (less positive and more negative) the correlation between asset returns, ________.

A firm produces goods which has high sales when the economy is expanding and low sales during a recession. This firm's overall risk will be higher if it invests in another product which is counter cyclical.

The real utility of the coefficient of variation is in comparing assets that have equal expected returns.

As risk aversion increases ________.

A ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.

Nondiversifiable risk reflects the contribution of an asset to the risk, or standard deviation, of the portfolio.

In the capital asset pricing model, the general risk preferences of investors in the marketplace are reflected by ________.

What is the expected market return if the expected return on Asset X is 20 percent, its beta is 1.5, and the risk free rate is 5 percent?

The beta associated with a risk-free asset ________.

A portfolio combining two assets whose returns are less than perfectly positive correlated can increase total risk to a level above that of either of the components.

Greater risk aversion results in lower required returns for each level of risk, whereas a reduction in risk aversion would cause the required return for each level of risk to increase as depicted by SML.

Nico bought 500 shares of a stock for $24.00 per share on January 1, 2013. He received a dividend of $2.50 per share at the end of 2013 and $4.00 per share at the end of 2014. At the end of 2015, Nico collected a dividend of $3.00 per share and sold his stock for $20.00 per share. What is Nico's realized total rate of return?

The security market line (SML) reflects the required return in the marketplace for each level of nondiversifiable risk (beta).

Larger the difference between an asset's worst outcome from its best outcome, the higher the risk of an asset.