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Fin 3504 Ch. 6 exam questions
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Terms in this set (18)
Risk that can be eliminated through diversification is called_____
Unique, firm specific, diversifiable
Many current and retired Enron Corp. employees had their 401K retirement accounts whipped out when Enron collapsed because the
401K were not well diversified
Asset A has one expected delivery of 15% and a reward to vulnerability ratio of .4. Asset B has a expected return of 20% and a reward to vulnerability ratio of .3.
A risk averse investor would prefer a potrfolio using the risk- free asset and _____
Asset A
An investors degree of risk aversion will determine his or hers
optimal mix of the risk free asset and risky asset
This statistic could be negative by _______
variance- multiplying difference of expected return to the actual return and then squaring
The correlation coefficient btwn two assets equals?
their co-variance divided by the product of their standard deviations
the expected rate of return of a portfolio of risky securities is
weighted sum of the securities expected return
The risk that can be diversified away is
Firm specific risk
The____ decision should take precedence over the ____ decision
Asset allocation; stock selection
Know correlation between securities
negative= securities move opposite of another
Equal= no correlation
positive= securities move together
Adding additionrisky assets to the investment opportunity set will generally move the efficient frontier ______ and to the _____
Up;left
The ____ is equal to the square root of the systematic variance divided by the total variance
Correlation coefficient
Asset A has an expected return of 20% And a standard deviation of 25%. The risk free rate is 10%. What is the reward-to- variability ratio (sharpe ratio)
.4
Diversification is most effective when security returns are
uncorrelated
Beta is a measure of security responsiveness to_____
Market risk
Approximately how many securities does it take to diversify almost all of the unique risk from a portfolio
20- more the better
Market risk is also called _____ and _____
Systematic risk;
Standard deviation of return on investment A is .1, while the standard dev. of return on investment B is .05. If the covariance of returns on A and B is .0030, the correlation coefficient btwn the returns on A and B is _____
.60
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