FNAN 522 FINAL EXAM STUDY GUIDE FULLY SOLVED
Systematic risk - Answers Also known as non-diversifiable risk, attributable to market factors that affect
all firms; can't be eliminated through diversification
Unsystematic risk - Answers Also known as diversifiable risk, attributable to firm-specific, random
causes; can be eliminated through diversification.
Beta - Answers Relative measure of non-diversifiable risk. An index of the degree of movement of an
asset's return in response to a change in the market return
CAPM(Capital Asset Pricing Model) - Answers Describes the relationship btw the required return and the
non-diversifiable risk of the firm as measured by beta.
CAPM(2) - Answers The basic theory that links risk and return for all assets
SML(Security Market Line) - Answers Depiction of the CAPM as a graph that reflects the required return
in the marketplace for each level of non-diversifiable risk
Risk Averse - Answers The attitude toward risk where investors would require an increased return as
compensation for an increase in risk
Annuity - Answers A stream of equal periodic cash flows over a specified time period. These cash flows
can be inflows or outflows
Annuity Due - Answers An annuity for which the cash flow occurs at the beginning of each period
Bond - Answers Long-term debt instrument used by business and government to raise large sums of
money, generally from a diverse group of lenders
Preferred Stock - Answers A special form of ownership having a fixed periodic dividend that must be
paid prior to payment of any dividends to common stockholders
Common Stock - Answers The purest and most basic form of corporate ownership
Gordon Model - Answers Also known as the constant growth model that is widely cited in dividend
valuation
Diversification - Answers Reduces risk, combines to adds assets that have a low correlation with each
other
Risk - Answers A measure of uncertainty surrounding the return that an investment will earn or, more
formally, the variability of returns associated with a given asset
C.V.(Coefficient of variation) - Answers A measure of relative dispersion that is useful in comparing the
risks of assets with differing expected returns
Payback Method - Answers How long it takes to recover an investment
Systematic risk - Answers Also known as non-diversifiable risk, attributable to market factors that affect
all firms; can't be eliminated through diversification
Unsystematic risk - Answers Also known as diversifiable risk, attributable to firm-specific, random
causes; can be eliminated through diversification.
Beta - Answers Relative measure of non-diversifiable risk. An index of the degree of movement of an
asset's return in response to a change in the market return
CAPM(Capital Asset Pricing Model) - Answers Describes the relationship btw the required return and the
non-diversifiable risk of the firm as measured by beta.
CAPM(2) - Answers The basic theory that links risk and return for all assets
SML(Security Market Line) - Answers Depiction of the CAPM as a graph that reflects the required return
in the marketplace for each level of non-diversifiable risk
Risk Averse - Answers The attitude toward risk where investors would require an increased return as
compensation for an increase in risk
Annuity - Answers A stream of equal periodic cash flows over a specified time period. These cash flows
can be inflows or outflows
Annuity Due - Answers An annuity for which the cash flow occurs at the beginning of each period
Bond - Answers Long-term debt instrument used by business and government to raise large sums of
money, generally from a diverse group of lenders
Preferred Stock - Answers A special form of ownership having a fixed periodic dividend that must be
paid prior to payment of any dividends to common stockholders
Common Stock - Answers The purest and most basic form of corporate ownership
Gordon Model - Answers Also known as the constant growth model that is widely cited in dividend
valuation
Diversification - Answers Reduces risk, combines to adds assets that have a low correlation with each
other
Risk - Answers A measure of uncertainty surrounding the return that an investment will earn or, more
formally, the variability of returns associated with a given asset
C.V.(Coefficient of variation) - Answers A measure of relative dispersion that is useful in comparing the
risks of assets with differing expected returns
Payback Method - Answers How long it takes to recover an investment
