| A | B |
|---|
| risk premium | difference between return on a risky investment and that of a risk-free investment |
| projected/expected risk premium | difference between expected return on a risky investment & the certain return on a risk-free investment |
| If the expected return on stock A is 20% and risk fre investment is 8%, what is the projected risk premium? | 12% |
| If expected return on stock B is 15% and risk free rate is 5%, what is the projected risk premium? | 10% |
| If stock C has an expected return of 30% and risk free investment rate is 10%, what is the expected risk premium? | 20% |
| If expected return on Stock D is 30% and risk free rate is 2%, what is the projected risk premium? | 28% |
| standard deviation is the | square root of the variance |
| portfolio weight | percentage of a portfolio's total value in a particular asset |
| portfolio | group of assets such as stocks and bonds held by an investor |
| If a portfolio of $200 has $50 in Asset A & $150 in Asset B, what is the portfolio wt. of Asset A? | .25 |
| If a portfolio has a value of $200, $50 in Asset A and $150 in Asset B, what is the portfolio wt. of Asset B? | .75 |
| If a portfolio of $500 has $100 in Stocks and $400 in bonds, what is the portfolio wt. of Stocks? | .20 |
| If portfolio of $500 has $100 in stocks and $400 in bonds, what is the portfolio wt. of bonds? | .80 |
| A total return on a stock in the coming year would be equal to | expected return & unexpected return |
| If a predicted GDP is released, the prediction is already factored into the | expected return E(R) |
| if an announced GDP is a surprise, the efefct will be part of | the unexpected return U |
| if an announcement about a stock isn't news, the market has already ____ the announcement | discounted |
| if you discount a dollar in the future, it is worth less because of the | time value of money |
| An announcement is made up of | expected part & surprise |
| surprise | difference between the actual result and the forecast |
| under what conditions will an announcement have no effect on common stock prices | if it is the same as expected |
| another name for systematic risk | market risks |
| systematic risk | risk that affects a large number of assets |
| unsystematic risk | risk that affects a single asset or small group of assets |
| another name of unsystematic risk | unique or asset-specific risk |
| examples of systematic risk | GDP, interest rates or inflation |
| examples of unsystematic risks | strikes, lawsuits |
| the standard deviation _____ as the number of securities in a portfolio increases | declines |
| principle of diversification | spreading an investment across a number of assets will eliminate some, but not all, risk |
| diversification | spreading an investment across assets |
| nondiversifiable risk | minimum level of risk that cannot be eliminated simply by diversifying |
| unsystematic risk is esentially _____ by diversification | eliminated |
| a relatively large portfolio has almost ___ unsystematic risk | no |
