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Ch 06- FIN
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Terms in this set (32)
Risk that can be eliminated through diversification is called ______ risk.
all of these options: unique, firm-specific, and diversifiable.
The ____ decision should take precedence over the ____ decision.
Asset allocation, stock selection.
Many current and retired Enron employees had their 401k retirement accounts wiped out when Enron collapsed because _____.
their 401k accounts were not well diversified.
Asset A has an expected return of 15% and a reward-to-variability ratio of .4. Asset B has an expected return of 20% and a reward-to-variability ratio of .3. A risk-averse investor would prefer a portfolio using the risk-free asset and ____.
Asset A (The higher reward-to-variability wins)
Adding additional risky assets to the investment opportunity set will generally move the efficient frontier ____ and to the ____.
Up; left.
An investor's degree of risk-aversion will determine his or her _____.
Optimal mix of the risk-free asset and risky asset.
The ___ is equal to the square root of the systematic variance divided by the total variance.
Correlation Coefficient (CC)
Which of the following statistics cannot be negative?
Variance
The correlation coefficient between two assets equals _____.
their covariance divided by the product of their standard deviation.
Diversification is most effective when security returns are _____.
Negatively correlated.
The expected rate of return of a portfolio of risky securities is ____.
The weighted sum of the securities' expected returns.
Beta is a measure of a security responsiveness to ____.
market risk.
The risk that can be diversified away is ____.
Firm-specific risk.
Consider an investment opportunity set formed with two securities that are perfectly negatively correlated. The global minimum-variance portfolio has a standard deviation that is always ____.
equal to 0
Market risk is also called _____ and ______.
systematic risk; nondiversifiable risk.
Firm-specific risk is also called _____ and ______.
unique risk; diversifiable risk.
Which of the following stock return statistics fluctuates the most over time?
Average return
Harry Markowitz is best known for his Nobel prize-winning work on ____.
techniques used to identify efficient portfolios of risky assets.
Suppose that a stock portfolio and a bond portfolio have a zero correlation. This means that ______.
the returns on the stock and bond portfolios tend to vary independently of each other.
You put half your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolios have a correlation of .55. The standard deviation of the resulting portfolio will be.
More than 12% but less than 18%.
On a standard expected return versus standard deviation graph, investors will prefer portfolios that lie to the ______ of the current investment opportunity set.
Left and above
The term complete portfolio refers to a portfolio consisting of ____.
The risk free asset combined with at least one risky asset.
Rational risk-averse investors will always prefer portfolios ___.
located on the capital market line to those located on the efficient frontier.
The optimal risky portfolio can be identifies by finding:
Tangency; steepest slope.
The ____ reward-to-variability ratio is found on the _____ capital market line
highest; steepest
A measure of the riskiness of an asset held in isolation is ___.
standard deviation.
The part of a stocks return is systematic is a function of which of the following variables?
Volatility; sensitivity
Which risk can be partially or fully diversified away as additional securities are added to a portfolio?
Total risk; firm-specific risk
According to Tobin's separation property, portfolio choice can be separated into two independent tasks consisting of ___ and ____.
identifying the optimal risky portfolio from T-bills and the optimal risky portfolio; constructing a complete portfolio from T-bills and the optimal risky portfolio based on the investor's degree of risk aversion.
You are constructing a scatter plot of excess returns for stock A versus the market index. If the correlation coefficient between stock A and the index is -1, you will find that the points of the scatter diagram ___ and the line of best fit has a _____.
all fall on the line of best fit; negative slope.
The term excess return refers to ____.
the difference between the rate of return earned and the risk-free rate.
You are recalculating the risk of ACE stock in relation....
correlation coefficient between ACE and the market has risen.
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