Financial Risk Management Exam 1 with all Correct &
100% Verified Answers |Actual Complete Exam |
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a weighted average of the possible returns, where the weight applied to a particular return equals
the probability of that return occurring ✔Correct Answer-expected return
Q: Why's the coefficient of variation (CV) a better measure of stand-alone risk that the standard
deviation of an asset? ✔Correct Answer-A: the CV reflects the effects of both RISK & RETURN
Q: What's an "optimal" portfolio? ✔Correct Answer-A: One that MINIMIZES risk & MAXIMIZES
expected returns
Q: How can we form an optimal portfolio? ✔Correct Answer-A: add additional securities to our
portfolio that will move us further in a NORTHWEST direction
--the limit of how far we can move in a northwest direction
--represents all risk-return combo's that can be created by combining RISKY assets ✔Correct
Answer-Efficient frontier
Where are individual stocks plotted with respect to the efficient frontier? ✔Correct Answer-
Southeast
__________ allows us to create risk-return combo's that are superior to a single stock ✔Correct
Answer-Diversification
the efficient frontier is superior because it represents portfolios that provide the greatest
___________ for a given level of __________ (or the least amount of __________ for a given level of
_________). ✔Correct Answer-return for a given level of risk
(risk for a given level of return)
Portfolios that provide the greatest return for a given level of risk are said to be ___________
✔Correct Answer-efficient
the capital market line (CML) is also known as _______ ✔Correct Answer-new efficient frontier
the tangency point on the CML that indicates the portfolio of risky assets that's best to combine with
the risk-free asset is known as ____ ✔Correct Answer-market portfolio (M)
on the CML, the ___________ is the optimal portfolio of risky assets for all investors ✔Correct
Answer-market portfolio (M)
on the CML: since all investors differ in their tolerance to risk, they will allocate different amounts to
the _______ & ________ assets ✔Correct Answer-risk-free (F) & risky (M)
As an investor's risk aversion increases, he will allocate _______ to F and _________ to M
✔Correct Answer-more
less
, On the CML: An investor can achieve points above M on the CML by doing what? ✔Correct
Answer-Borrowing @ the risk-free rate and investing his original funds and the borrowed funds
exclusively in M
CML: all investors should choose the ________ __________ of risky assets (M) and reflect their
_______ _____ _______ by combining this risk investment with borrowing or lending the risk-free
asset ✔Correct Answer-same portfolio
apetite for risk
--the portion of a stock's risk that is attributable to factors specific to that one stock
--thus, this risk can be offset by investing in stocks that don't share that factor
--aka company-unique risk, diversifiable risk
--ex) lawsuit outcomes, regulatory rulings, issues with management team, new product launches
✔Correct Answer-Nonsystematic risk
--refers to the portion of a stock's risk that's attributable to factors that affect all stocks to some
degree
--this risk is inherent to the entire economic system, and thus CANNOT be reduced by diversification
--ex) economic news, catastrophes, oil prices or interest rates changing unexpectedly, Warren Buffet
saying "SELL EVERYTHING!"
--aka market risk, nondiversifiable risk ✔Correct Answer-systematic risk
equation that equates the expected return on a stock to the risk-free rate plus a risk premium due to
the stock's systematic risk ✔Correct Answer-Capital asset pricing model (CAPM)
______ tells us how many times the market risk premium is deserved as a risk premium for security i.
✔Correct Answer-Beta of security i
What's the expected return of a stock with a Beta of 0? ✔Correct Answer-equal to the risk-free
rate
What's the E(R) for a security with a Beta of 1? ✔Correct Answer-equal to the Market Portfolio
The _________ is a graphical representation of the CAPM equation that represents the E(R) for a
level of Beta. ✔Correct Answer-Security Market Line (SML)
If an asset's actual return is above its E(R) (above the SML), it's ____________.
What should you do with it? ✔Correct Answer-underpriced
buy it!
If an asset's actual return is below it's E(R) (below the SML), it's ________.
What should you do with it? ✔Correct Answer-Overpriced
Sell it!
When a portfolio manager produces a higher return than what is expected given the amount of
systematic risk, the extra return is referred to as _________. ✔Correct Answer-Alpha
What single factor does an asset's return depend on in CAPM? ✔Correct Answer-return on the
market portfolio
100% Verified Answers |Actual Complete Exam |
Already Graded A+
a weighted average of the possible returns, where the weight applied to a particular return equals
the probability of that return occurring ✔Correct Answer-expected return
Q: Why's the coefficient of variation (CV) a better measure of stand-alone risk that the standard
deviation of an asset? ✔Correct Answer-A: the CV reflects the effects of both RISK & RETURN
Q: What's an "optimal" portfolio? ✔Correct Answer-A: One that MINIMIZES risk & MAXIMIZES
expected returns
Q: How can we form an optimal portfolio? ✔Correct Answer-A: add additional securities to our
portfolio that will move us further in a NORTHWEST direction
--the limit of how far we can move in a northwest direction
--represents all risk-return combo's that can be created by combining RISKY assets ✔Correct
Answer-Efficient frontier
Where are individual stocks plotted with respect to the efficient frontier? ✔Correct Answer-
Southeast
__________ allows us to create risk-return combo's that are superior to a single stock ✔Correct
Answer-Diversification
the efficient frontier is superior because it represents portfolios that provide the greatest
___________ for a given level of __________ (or the least amount of __________ for a given level of
_________). ✔Correct Answer-return for a given level of risk
(risk for a given level of return)
Portfolios that provide the greatest return for a given level of risk are said to be ___________
✔Correct Answer-efficient
the capital market line (CML) is also known as _______ ✔Correct Answer-new efficient frontier
the tangency point on the CML that indicates the portfolio of risky assets that's best to combine with
the risk-free asset is known as ____ ✔Correct Answer-market portfolio (M)
on the CML, the ___________ is the optimal portfolio of risky assets for all investors ✔Correct
Answer-market portfolio (M)
on the CML: since all investors differ in their tolerance to risk, they will allocate different amounts to
the _______ & ________ assets ✔Correct Answer-risk-free (F) & risky (M)
As an investor's risk aversion increases, he will allocate _______ to F and _________ to M
✔Correct Answer-more
less
, On the CML: An investor can achieve points above M on the CML by doing what? ✔Correct
Answer-Borrowing @ the risk-free rate and investing his original funds and the borrowed funds
exclusively in M
CML: all investors should choose the ________ __________ of risky assets (M) and reflect their
_______ _____ _______ by combining this risk investment with borrowing or lending the risk-free
asset ✔Correct Answer-same portfolio
apetite for risk
--the portion of a stock's risk that is attributable to factors specific to that one stock
--thus, this risk can be offset by investing in stocks that don't share that factor
--aka company-unique risk, diversifiable risk
--ex) lawsuit outcomes, regulatory rulings, issues with management team, new product launches
✔Correct Answer-Nonsystematic risk
--refers to the portion of a stock's risk that's attributable to factors that affect all stocks to some
degree
--this risk is inherent to the entire economic system, and thus CANNOT be reduced by diversification
--ex) economic news, catastrophes, oil prices or interest rates changing unexpectedly, Warren Buffet
saying "SELL EVERYTHING!"
--aka market risk, nondiversifiable risk ✔Correct Answer-systematic risk
equation that equates the expected return on a stock to the risk-free rate plus a risk premium due to
the stock's systematic risk ✔Correct Answer-Capital asset pricing model (CAPM)
______ tells us how many times the market risk premium is deserved as a risk premium for security i.
✔Correct Answer-Beta of security i
What's the expected return of a stock with a Beta of 0? ✔Correct Answer-equal to the risk-free
rate
What's the E(R) for a security with a Beta of 1? ✔Correct Answer-equal to the Market Portfolio
The _________ is a graphical representation of the CAPM equation that represents the E(R) for a
level of Beta. ✔Correct Answer-Security Market Line (SML)
If an asset's actual return is above its E(R) (above the SML), it's ____________.
What should you do with it? ✔Correct Answer-underpriced
buy it!
If an asset's actual return is below it's E(R) (below the SML), it's ________.
What should you do with it? ✔Correct Answer-Overpriced
Sell it!
When a portfolio manager produces a higher return than what is expected given the amount of
systematic risk, the extra return is referred to as _________. ✔Correct Answer-Alpha
What single factor does an asset's return depend on in CAPM? ✔Correct Answer-return on the
market portfolio
