BSNS114 Final Exam with Questions
and 100% Correct Answers
What are the two ways to measure risk - Answer Standard deviation/variance or
risk premium
Risk premium - Answer Expected return for bearing risk
Most to least risky assets - Answer Small stocks, large stocks, high yield corp bonds,
LT corp bonds, LT govt bonds, municipal bonds, treasury bills, cash.
Portfolio of stocks - Answer A collection of assets held by an investor.
Diversification - Answer Investing in 2 or more risky assets whose values do not always
move in the same direction at the same time. It's about combining risky assets into a
portfolio, where the risk is offset to some extent because correlations are low. It
makes portfolio more stable (standard deviation/variance and risk premium is lower).
Standard deviation - Answer Spread of returns about the expected return
What does standard deviation measure? - Answer Total risk of the portfolio
, Is risk higher for a diversified portfolio in comparison to an individual asset - Answer
No, the risk for a diversified portfolio is lower (so standard deviation/variance and risk
premium is lower).
What are the requirements for diversification? - Answer It can be across industries
or across asset classes.
Can a portfolio be non-diversified? - Answer Yes, diversification is not just holding a
lot of assets.
Can a portfolio have zero risk? - Answer No, you must always hold some risk when
investing in risky assets.
Non-Diversifiable Risk - Answer Risk we can't diversify away
Unsystematic risk - Answer Unique to individual companies (or in 1 industry). Can
be diversified away.
Systematic risk - Answer Related to whole market (across many businesses/industries).
Cannot be diversified away. Driven by changes in macroeconomic factors. Represented
by beta. Measure of the relationship between returns on an individual asset and
returns of the most diversified portfolio.
What does beta represent - Answer Systematic risk
Realized return - Answer Total return that occurs over a particular period.
and 100% Correct Answers
What are the two ways to measure risk - Answer Standard deviation/variance or
risk premium
Risk premium - Answer Expected return for bearing risk
Most to least risky assets - Answer Small stocks, large stocks, high yield corp bonds,
LT corp bonds, LT govt bonds, municipal bonds, treasury bills, cash.
Portfolio of stocks - Answer A collection of assets held by an investor.
Diversification - Answer Investing in 2 or more risky assets whose values do not always
move in the same direction at the same time. It's about combining risky assets into a
portfolio, where the risk is offset to some extent because correlations are low. It
makes portfolio more stable (standard deviation/variance and risk premium is lower).
Standard deviation - Answer Spread of returns about the expected return
What does standard deviation measure? - Answer Total risk of the portfolio
, Is risk higher for a diversified portfolio in comparison to an individual asset - Answer
No, the risk for a diversified portfolio is lower (so standard deviation/variance and risk
premium is lower).
What are the requirements for diversification? - Answer It can be across industries
or across asset classes.
Can a portfolio be non-diversified? - Answer Yes, diversification is not just holding a
lot of assets.
Can a portfolio have zero risk? - Answer No, you must always hold some risk when
investing in risky assets.
Non-Diversifiable Risk - Answer Risk we can't diversify away
Unsystematic risk - Answer Unique to individual companies (or in 1 industry). Can
be diversified away.
Systematic risk - Answer Related to whole market (across many businesses/industries).
Cannot be diversified away. Driven by changes in macroeconomic factors. Represented
by beta. Measure of the relationship between returns on an individual asset and
returns of the most diversified portfolio.
What does beta represent - Answer Systematic risk
Realized return - Answer Total return that occurs over a particular period.
