MGT 181 FINAL EXAM QUESTIONS & ANSWERS
Risk and Return: ______ ______ is the standard deviation of a stock's return. ______
______ consists of the expected and unexpected returns. ______ ______ (market risks,
non-diversifiable) consist of unanticipated events that affect almost all assets to some
degree like elections, GDP, inflation, interest rates. ______ ______ (unique or asset
specific risk) are unanticipated events that affect single assets of small groups of assets
like labor strikes, shortages. The _____ is that some but not all the risks associated with
a risky investment can be eliminated by diversification. - Answer -total risk, total return,
systematic risk, unsystematic risk, diversification
______ _____ _____ is that the reward for bearing risk depends only on systematic risk
(not unsystematic risk that can be diversified away). The level of systematic risk in an
asset, relative to the average, is the _____ of the asset. ____ _____ _____ was
founded by Markowitz, Sharpe, and Miller who won the Nobel Prize in Financial
Economics as the basis for modern financial management. - Answer -Systematic risk
principal, beta, Modern Portfolio Theory,
The _____ ___ _____ _____ is the ratio of its risk premium (E(Ri)-Rf) to its Beta. This is
the same for every asset. Thus all assets plot on the same line - _____ _____ _____
(SML). The _____ _____ ______ _____ (CAPM) from the SML the expected return on
asset (i) can be written: E(Ri)=Rf + [E(Rm)-Rf]*Beta. - Answer -reward to risk ratio,
security market line, capital asset pricing model
________ returns are generally not equal to expected returns. There is the _______
component and the ______ component. At any point in time, the unexpected return can
be either _____ or _____, but overtime the average of the unexpected component is
____. Announcements and news contain both components, but it is the _____
component that affect a stock's price and return. - Answer -Realized, expected,
unexpected, positive, negative, zero, unexpected
Efficient markets are a result of investors trading on the ______ portion of
announcements. The easier it is to trade on surprises, the more ______ markets are.
Efficient markets involve _____ price changes because we cannot predict surprises.
The stock market is drivien by three powerful things: better global ______ data, _____
continuously put back into the market, and expectations that _____'s pro-growth
announcements will translate to policies. - Answer -unexpected, efficient, random,
economic, cash, trump
Total return = ______ _____+ ______ _____. Unexpected return = ______ _____ +
______ ______. (You can combine both equations). A ________ is a collection of
assets. An asset's risk and return are important in relation to the _______. The risk-
return trade-off for a portfolio is measured by the ______ ____ _____ (weighted
average of the expected returns of the respective assets in the portfolio OR portfolio
return in each possible state and computing expected value like individual securities)
, and _____ _____ like individual assets. - Answer -expected return + unexpected return,
systematic portion + unsystematic portion, portfolio, portfolio, portfolio expected return,
standard deviation
______ ______ is the investment in several different asset classes or sectors. It (is,
isn't) the same as holding a lot of assets (e.g. owning 50 internet stocks total is not
diversified but if they span 20 industries then diversified). ______ can substantially
reduce the variability of returns without equivalent reduction in expected returns,
because the reduction in risk comes from worse than expected returns from one asset
being offset by better than expected returns from another. But the minimum level of risk
not diversiable is the _______ portion. - Answer -portfolio diversification, isn't,
diversification, systematic
_______ risk (similar to unsystematic, unique, or asset-specific risk) can be eliminated
by combining assets into a portfolio. Total risk = ______ ____ + ______ _____. The
_____ ______ of returns is a measure of total risk. Well-diversified portfolios have a
very (small, large) unsystematic risk, so the total risk for a diversified portfolio = ______
risk. - Answer -diversifiable, systematic risk, unsystematic risk, standard deviation,
small, systematic
The ______ _____ _____: there is a reward for bearing risk, there is not a reward for
bearing risk unecessarily. Expected return on a risky asset depends solely on _______
risk since _____ risk can be diversified away. _____ ______ is a measure of systematic
risk. If it is 1, then the asset has the (more, less, same) systematic risk as the overall
market. If it is less than 1, then the asset has (more, less, same) systematic risk than
the overall market. If it is more than 1, then the asset has (more, less, same) systematic
risk than the overall market. - Answer -systematic risk principle, systematic,
unsystematic, beta coefficient. same, less, more
The expected risk premium = ____ ____- ____ ___ ____. The higher the beta, the
(greater, lesser) the risk premium should be. You can define the _____ between the risk
premium and beta to estimate expected return. _____ _____ is achieved when all
assets and portfolios must have the same reward-to-risk ratio equaling that of the
market defined by: (_____-______)/_____=(_____-______)/_____. The _____ ____
_____ (SML) represents this market eq. The slope of the SML is the reward-to-risk ratio:
(E(Rm)-Rf)/Bm, but since the beta for the market is _____ equal to one, the slope can
be rewritten as E(Rm)-Rf or the ____ ____ ____. - Answer -expected return, risk-free
rate, greater, relationship, market equilibrium, (E(Ra)-Rf)/Ba=E(Rm-Rf)/Bm, security
market line, always, market risk premium
The ____ ____ ____ ____ (CAPM) defines the relationship between risk and return,
equaling E(Ra)=Rf+Ba(E(Rm)-Rf). If we know the asset's systematic risk (financial or
physical), we can use the CAPM to determine its _____ ____. Factors that affect the
expected return include the ____ ___ ___ of money (measured by the risk free rate),
_____ for bearing systematic risk (measured by the market risk premium), ____ of
Risk and Return: ______ ______ is the standard deviation of a stock's return. ______
______ consists of the expected and unexpected returns. ______ ______ (market risks,
non-diversifiable) consist of unanticipated events that affect almost all assets to some
degree like elections, GDP, inflation, interest rates. ______ ______ (unique or asset
specific risk) are unanticipated events that affect single assets of small groups of assets
like labor strikes, shortages. The _____ is that some but not all the risks associated with
a risky investment can be eliminated by diversification. - Answer -total risk, total return,
systematic risk, unsystematic risk, diversification
______ _____ _____ is that the reward for bearing risk depends only on systematic risk
(not unsystematic risk that can be diversified away). The level of systematic risk in an
asset, relative to the average, is the _____ of the asset. ____ _____ _____ was
founded by Markowitz, Sharpe, and Miller who won the Nobel Prize in Financial
Economics as the basis for modern financial management. - Answer -Systematic risk
principal, beta, Modern Portfolio Theory,
The _____ ___ _____ _____ is the ratio of its risk premium (E(Ri)-Rf) to its Beta. This is
the same for every asset. Thus all assets plot on the same line - _____ _____ _____
(SML). The _____ _____ ______ _____ (CAPM) from the SML the expected return on
asset (i) can be written: E(Ri)=Rf + [E(Rm)-Rf]*Beta. - Answer -reward to risk ratio,
security market line, capital asset pricing model
________ returns are generally not equal to expected returns. There is the _______
component and the ______ component. At any point in time, the unexpected return can
be either _____ or _____, but overtime the average of the unexpected component is
____. Announcements and news contain both components, but it is the _____
component that affect a stock's price and return. - Answer -Realized, expected,
unexpected, positive, negative, zero, unexpected
Efficient markets are a result of investors trading on the ______ portion of
announcements. The easier it is to trade on surprises, the more ______ markets are.
Efficient markets involve _____ price changes because we cannot predict surprises.
The stock market is drivien by three powerful things: better global ______ data, _____
continuously put back into the market, and expectations that _____'s pro-growth
announcements will translate to policies. - Answer -unexpected, efficient, random,
economic, cash, trump
Total return = ______ _____+ ______ _____. Unexpected return = ______ _____ +
______ ______. (You can combine both equations). A ________ is a collection of
assets. An asset's risk and return are important in relation to the _______. The risk-
return trade-off for a portfolio is measured by the ______ ____ _____ (weighted
average of the expected returns of the respective assets in the portfolio OR portfolio
return in each possible state and computing expected value like individual securities)
, and _____ _____ like individual assets. - Answer -expected return + unexpected return,
systematic portion + unsystematic portion, portfolio, portfolio, portfolio expected return,
standard deviation
______ ______ is the investment in several different asset classes or sectors. It (is,
isn't) the same as holding a lot of assets (e.g. owning 50 internet stocks total is not
diversified but if they span 20 industries then diversified). ______ can substantially
reduce the variability of returns without equivalent reduction in expected returns,
because the reduction in risk comes from worse than expected returns from one asset
being offset by better than expected returns from another. But the minimum level of risk
not diversiable is the _______ portion. - Answer -portfolio diversification, isn't,
diversification, systematic
_______ risk (similar to unsystematic, unique, or asset-specific risk) can be eliminated
by combining assets into a portfolio. Total risk = ______ ____ + ______ _____. The
_____ ______ of returns is a measure of total risk. Well-diversified portfolios have a
very (small, large) unsystematic risk, so the total risk for a diversified portfolio = ______
risk. - Answer -diversifiable, systematic risk, unsystematic risk, standard deviation,
small, systematic
The ______ _____ _____: there is a reward for bearing risk, there is not a reward for
bearing risk unecessarily. Expected return on a risky asset depends solely on _______
risk since _____ risk can be diversified away. _____ ______ is a measure of systematic
risk. If it is 1, then the asset has the (more, less, same) systematic risk as the overall
market. If it is less than 1, then the asset has (more, less, same) systematic risk than
the overall market. If it is more than 1, then the asset has (more, less, same) systematic
risk than the overall market. - Answer -systematic risk principle, systematic,
unsystematic, beta coefficient. same, less, more
The expected risk premium = ____ ____- ____ ___ ____. The higher the beta, the
(greater, lesser) the risk premium should be. You can define the _____ between the risk
premium and beta to estimate expected return. _____ _____ is achieved when all
assets and portfolios must have the same reward-to-risk ratio equaling that of the
market defined by: (_____-______)/_____=(_____-______)/_____. The _____ ____
_____ (SML) represents this market eq. The slope of the SML is the reward-to-risk ratio:
(E(Rm)-Rf)/Bm, but since the beta for the market is _____ equal to one, the slope can
be rewritten as E(Rm)-Rf or the ____ ____ ____. - Answer -expected return, risk-free
rate, greater, relationship, market equilibrium, (E(Ra)-Rf)/Ba=E(Rm-Rf)/Bm, security
market line, always, market risk premium
The ____ ____ ____ ____ (CAPM) defines the relationship between risk and return,
equaling E(Ra)=Rf+Ba(E(Rm)-Rf). If we know the asset's systematic risk (financial or
physical), we can use the CAPM to determine its _____ ____. Factors that affect the
expected return include the ____ ___ ___ of money (measured by the risk free rate),
_____ for bearing systematic risk (measured by the market risk premium), ____ of
