Finance- Chapter 11

Front 1

Which one of the following returns is the average return you expect to earn in the future on a risky asset?

Back 1

Expected return

Front 2

What is the extra compensation paid to an investor who invests in a risky asset rather than in a risk-free asset called?

Back 2

risk premium

Front 3

A group of stocks and bonds held by an investor is called which one of the following?

Back 3

portfolio

Front 4

The value of an individual security divided by the portfolio value is referred to as the portfolio:

Back 4

weight

Front 5

Diversification is investing in a variety of assets with which one of the following as the primary goal?

Back 5

reducing some risks

Front 6

Correlation is the:

Back 6

extent to which the returns on two assets move together.

Front 7

The division of a portfolio's dollars among various types of assets is referred to as:

Back 7

asset allocation

Front 8

Which one of the following is a collection of possible risk-return combinations available from portfolios consisting of individual assets?

Back 8

investment opportunity set

Front 9

An efficient portfolio is a portfolio that does which one of the following?

Back 9

offers the highest return for a given level of risk

Front 10

Which one of the following is the set of portfolios that provides the maximum return for a given standard deviation?

Back 10

Markowitz efficient frontier

Front 11

Which of the following are affected by the probability of a state of the economy occurring?

Back 11

I. expected return of an individual security
II. expected return of a portfolio
III. standard deviation of an individual security
IV. standard deviation of a portfolio

Front 12

Which one of the following statements must be true?

Back 12

Considering the possible states of the economy emphasizes the fact that multiple outcomes can be realized from an investment.

Front 13

You own a portfolio of 5 stocks and have 3 expected states of the economy. You have twice as much invested in Stock A as you do in Stock E. How will the weights be determined when you compute the rate of return for each economic state?

Back 13

The weights will be based on the amount invested in each stock as a percentage of the total amount invested.

Front 14

Terry has a portfolio comprised of two individual securities. Which one of the following computations that he might do is NOT a weighted average?

Back 14

correlation between the securities

Front 15

You own a stock which is expected to return 14 percent in a booming economy and 9 percent in a normal economy. If the probability of a booming economy decreases, your expected return will:

Back 15

decrease

Front 16

You own three securities. Security A has an expected return of 11 percent as compared to 14 percent for Security B and 9 percent for Security C. The expected inflation rate is 4 percent and the nominal risk-free rate is 5 percent. Which one of the following statements is correct?

Back 16

Security B has a risk premium that is 50 percent greater than Security A's risk premium.

Front 17

Which of the following will increase the expected risk premium for a security, all else constant?

Back 17

I. an increase in the security's expected return
IV. a decrease in the risk-free rate

Front 18

If the future return on a security is known with absolute certainty, then the risk premium on that security should be equal to:

Back 18

zero

Front 19

You own a stock that will produce varying rates of return based upon the state of the economy. Which one of the following will measure the risk associated with owning that stock?

Back 19

variance of the returns given the multiple states of the economy

Front 20

Which of the following affect the expected rate of return for a portfolio?

Back 20

I. weight of each security held in the portfolio
II. the probability of various economic states occurring
IV. the expected rate of return of each security given each economic state