Exam 8: Risk and Return

Even if assets are not negatively correlated, lower the positive correlation between them, the lower the resulting risk.

Table 8.3 Consider the following two securities X and Y. -Which security (X or Y) in Table 8.3 has the least total risk? Which has the least systematic risk?

For a risk-averse manager, the required return increases for an increase in risk.

The interest rate risk associated with Treasury bonds is much higher than with bills.

War, inflation, and the condition of the foreign markets are all examples of ________.

Assuming the following returns and corresponding probabilities for asset A, compute its standard deviation and coefficient of variation.

Two assets whose returns move in the same direction and have a correlation coefficient of +1 are very risky assets.

Returns from internationally diversified portfolios tend to be superior to those yielded by purely domestic ones.

The risk of a portfolio containing international stocks generally does not contain less nondiversifiable risk than one that contains only domestic stocks.

The capital asset pricing model (CAPM) links together unsystematic risk and return for all assets.

Unsystematic risk ________.

For a risk-indifferent manager, no change in return would be required for an increase in risk.

The expected value and the standard deviation of returns for asset A is ________. (See below.) Asset A

A common approach of estimating the variability of returns involving the forecast of pessimistic, most likely, and optimistic returns associated with an asset is called ________.

Adam wants to determine the required return on a stock portfolio with a beta coefficient of 0.5. Assuming the risk-free rate of 6 percent and the market return of 12 percent, compute the required rate of return.

The expected value, standard deviation of returns, and coefficient of variation for asset A are ________. (See below.) Asset A

A financial manager's goal for the firm is to create a portfolio that maximizes return for a given level of risk.

In general, the lower the correlation between asset returns, the greater the potential diversification of risk.

Table 8.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: -Given the information in Table 8.2, what is the expected annual return of this portfolio?

Higher the coefficient of variation, the greater the risk and therefore the higher the expected return.