FINA 3000 Pope UGA Test 2 |Questions and
Answers
What is risk? - -The probability that actual future returns will deviate from
expected returns
- What does risk represent - -The variability of returns
- What does risk imply? - -A chance for some unfavorable event to occur
- What are examples of risk? - -Uncertainty in net income caused by
revenue, labor cost, inventory, or exchange rate
- What is average return? - -Average % return on investment over a sample
time period
- What is variance? - -How far do returns fall from the mean or average
- What is a return? - -The interest or % that we earn over a time period
(typically a year or month
- If variance increases, what happens to risk (volatility) - -It increases
- What formula do you use if calculating annual return? - -E(R)
- What does the E(R) formula represent? - -The capital gain + the dividend
yield
- What does Rhp find? - -The total compounded interest earned over a time
period of investment
- What does Rgeo find? - -Annual compounded return
- A Random Variable - -Some measurement that can have a number of
possible future outcomes
- Examples of Random Variables - -Temp, sales, expenses
- What is a probability distribution - -A function that assigns probabilities to
the various possible outcomes that a random variable can have
- What are the two forms of probability distributions? - -Discrete ad
Continuous
- How many possible outcomes are there in a discrete distribution? - -Finite
, - How many possible outcomes are there in a continuous distribution? - -
Infinite
- What must probabilities add up to? - -1
- What can we use a distribution to calculate? - -Expected value and
variance
- What does variance measure? - -The spread of the distribution or variation
in possible outcomes about the expected value
- 68%, 95%, 99.7% - -1 SD from mean, 2 SD from mean, 3 SD from mean
- Name the two sources for return on a stock - -Gain in price (capital gain)
and any dividend paid
- What can standard deviation also be called? - -Stand Alone Risk which
implies the risk associated with only investing in that stock
- If two stocks have the same E(R), what can we use to compare them? - -
The SD.
- Assuming E(R)s are equal, what does the SD tell one about risk? - -The
greater the SD, the more risky; so we would choose the stock with a smaller
SD
- If two stocks have different E(R), how do we measure risk? - -Using the
coefficient of variation formula. We will take the stock with the smallest COV
- COV Formula - -COV= SD/Mean
- What is a portfolio? - -A collection of two or more assests
- What is the goal of a portfolio? - -To increase assets and decrease risk of
portfolio
- What does correlation measure? - -How much two variables move or vary
together
- What can one infer about positively correlated stocks? - -The stocks tend
to move together. This means if stock A is above its average, stock B tends
to also be above its average
- In reality, all stocks are ___ correlated because... - -Positively; because
macro economic events move all stocks in the same direction
Answers
What is risk? - -The probability that actual future returns will deviate from
expected returns
- What does risk represent - -The variability of returns
- What does risk imply? - -A chance for some unfavorable event to occur
- What are examples of risk? - -Uncertainty in net income caused by
revenue, labor cost, inventory, or exchange rate
- What is average return? - -Average % return on investment over a sample
time period
- What is variance? - -How far do returns fall from the mean or average
- What is a return? - -The interest or % that we earn over a time period
(typically a year or month
- If variance increases, what happens to risk (volatility) - -It increases
- What formula do you use if calculating annual return? - -E(R)
- What does the E(R) formula represent? - -The capital gain + the dividend
yield
- What does Rhp find? - -The total compounded interest earned over a time
period of investment
- What does Rgeo find? - -Annual compounded return
- A Random Variable - -Some measurement that can have a number of
possible future outcomes
- Examples of Random Variables - -Temp, sales, expenses
- What is a probability distribution - -A function that assigns probabilities to
the various possible outcomes that a random variable can have
- What are the two forms of probability distributions? - -Discrete ad
Continuous
- How many possible outcomes are there in a discrete distribution? - -Finite
, - How many possible outcomes are there in a continuous distribution? - -
Infinite
- What must probabilities add up to? - -1
- What can we use a distribution to calculate? - -Expected value and
variance
- What does variance measure? - -The spread of the distribution or variation
in possible outcomes about the expected value
- 68%, 95%, 99.7% - -1 SD from mean, 2 SD from mean, 3 SD from mean
- Name the two sources for return on a stock - -Gain in price (capital gain)
and any dividend paid
- What can standard deviation also be called? - -Stand Alone Risk which
implies the risk associated with only investing in that stock
- If two stocks have the same E(R), what can we use to compare them? - -
The SD.
- Assuming E(R)s are equal, what does the SD tell one about risk? - -The
greater the SD, the more risky; so we would choose the stock with a smaller
SD
- If two stocks have different E(R), how do we measure risk? - -Using the
coefficient of variation formula. We will take the stock with the smallest COV
- COV Formula - -COV= SD/Mean
- What is a portfolio? - -A collection of two or more assests
- What is the goal of a portfolio? - -To increase assets and decrease risk of
portfolio
- What does correlation measure? - -How much two variables move or vary
together
- What can one infer about positively correlated stocks? - -The stocks tend
to move together. This means if stock A is above its average, stock B tends
to also be above its average
- In reality, all stocks are ___ correlated because... - -Positively; because
macro economic events move all stocks in the same direction
