Question

Term Answer Description Risk A. The risk of an asset when it is the only asset in an investor's portfolio. Expected rate of return That portion of an investment's risk calculated as the difference between its total risk and its firm-specific risk. Beta coefficient This model determines the appropriate required return on a security as the sum of the market's risk-free rate and a risk premium based on the market's risk premium and the security's beta coefficient. Market risk The general term that describes the portion of an asset's total expected return that is greater than the return earned on the market's risk-free rate. E. Correlation coefficient (e) A measure of the sensitivity of a security's returns to fluctuations in the return earned by the market portfolio. Stand-alone risk F. The potential for variability in the possible outcomes associated with an investment. Risk premium O G. The me The mean of the probability distribution of an investment's possible returns, and the return expected to be realized from owning it. Diversification 0 H. The value of this ranges The value of this ranges from +1.0, denoting that two variables move up and down in perfect synchronization to -1.0, denoting that two variables move up and down in exactly opposite directions. The condition in which the expected return on a security equals its required return, and there is no pressure on its price to change. I. Capital Asset Pricing Model Equilibrium The practice of creating a portfolio of assets for the purpose of reducing the stand-alone risk of the individual assets in the portfolio.

Answer 1

Term Answer Risk G Expected rate of return Description The potential for variability in the possible outcomes associated with an investment. The mean of the probability distribution of an investment's possible returns, and the return expected to be realized from owning it. E.g. State of Probability Stock 'X' return economy Recession 0.20 10% Normal 0.80 40% Expected return of Stock 'X'= (0.20 x 10) + (0.80 x 40) = 34% A measure of the sensitivity of a security's returns to fluctuations in the return earned by the market portfolio. e Covariance of market return with security return or Variance of market return Standard deviation of security returns B = Correlation coefficient between market and security ** scury Standard deviation of market retuns That portion of an investment's risk calculated as the difference between its total risk and its firm-specific risk. It is also called systematic risk. It cannot be eliminated through diversification. Beta coefficient E Market risk

Correlation coefficient The value of this ranges from +1.0, denoting that two variables move up and down in perfect synchronization to -1.0, denoting that two variables move up and down in exactly opposite directions. Cov (x,y) Pxy = o X Oy Stand-alone risk • Pxy = correlation coefficient • Cov(x,y) = covariance between securities x & y • Ox = standard deviation of security x • Oy = standard deviation of security y The risk of an asset when it is the only asset in an investor's portfolio. It is measured by the standard deviation of the asset's expected returns. The general term that describes the portion of an asset's total expected return that is greater than the return earned on the market's risk-free rate. Compensation for extra risk undertaken in relation to risk-free asset. The practice of creating a portfolio of assets for the purpose of reducing the stand-alone risk of the individual assets in the portfolio. It is done to eliminate unsystematic risk in a portfolio. Risk premium Diversification

Capital Asset Pricing Model This model determines the appropriate required return on a security as the sum of the market's risk-free rate and a risk premium based on the market's risk premium and the security's beta coefficient. Ri = Rpg + B(Rm – Rrf) • Ri = Expected return on security • Rrf = Risk free rate of return B = Beta of the security • Rm = Expected return on market portfolio . (Rm – Rrf) = Market risk premium The condition in which the expected return on a security equals its required return, and there is no pressure on its price to change. It is a condition of price stability. Equilibrium