FINA 3332 - EXAM 4 Test Questions
and All Actual Answers 2026 Update.
risk - Answer The chance an outcome other than the expected one will occur.
probability distribution - Answer A listing of all possible outcomes or events, with a
probability (chance of occurrence) assigned to each outcome.
expected rate of return - Answer The average rate of return expected to be realized from an
investment; it is the mean value of the probability distribution of possible outcomes.
standard deviation - Answer A measure of the tightness, or variability, of a set of outcomes;
represents the total risk of an investment.
coefficient of variation (CV) - Answer A standardized measure of the risk per unit of return. It
is calculated by dividing the standard deviation by the expected return.
risk aversion - Answer Risk-averse investors require higher rates of return to invest in higher-
risk securities.
risk premium - Answer The portion of the expected return that can be attributed to the
additional risk of an investment. It is the difference between the expected rate of return on a
given risky asset and the expected rate of return on a less risky asset.
stand-alone risk - Answer The risk associated with an investment that is held by itself (in
isolation); it is the total risk associated with the investment.
expected return on a portfolio, r^p - Answer The weighted average of the expected returns
on the individual stocks held in a portfolio.
realized rate of return, r¨ - Answer The return that is actually earned. The actual return (r¨)
usually differs from the expected return (r^). (p.176)
diversification - Answer Reduction of stand-alone risk of an individual investment by
combining it with other investments in a portfolio.
correlation coefficient, ρ - Answer A measure of the degree of relationship between two
variables.
, Firm-specific - Answer That part of a security's risk associated with random outcomes
generated by events or behaviors specific to the firm. It can be eliminated through proper
diversification.
Market - Answer The part of a security's risk associated with economic, or market, factors
that systematically affect all firms to some extent. It cannot be eliminated through
diversification.
relevant risk - Answer The portion of a security's risk that cannot be diversified away; the
security's market risk. It reflects the security's contribution to the riskiness of a portfolio.
beta coefficient - Answer A measure of the extent to which the returns on a given stock move
with the stock market.
capital asset pricing model (CAPM) - Answer A model used to determine the required return
on an asset, which is based on the proposition that an asset's return should be equal to the risk-
free return plus a risk premium that reflects the asset's nondiversifiable (relevant) risk.
security market line (SML) - Answer The line that shows the relationship between risk as
measured by beta and the required rate of return for individual securities.
market risk premium (RPM) - Answer The additional return over the risk-free rate needed to
compensate investors for assuming an average amount of systematic (relevant) risk.
equilibrium - Answer The condition under which the expected return on a security is just
equal to its required return, r^=r, and the price is stable.
expected rate of return r^s - Answer The average rate of return expected to be realized from
an investment; it is the mean value of the probability distribution of possible outcomes.
Standard Deviation (SD) - Answer A measure of the tightness, or variability, of a set of
outcomes; represents the total risk of an investment.
risk premium (RP) - Answer The portion of the expected return that can be attributed to the
additional risk of an investment. It is the difference between the expected rate of return on a
given risky asset and the expected rate of return on a less risky asset.
and All Actual Answers 2026 Update.
risk - Answer The chance an outcome other than the expected one will occur.
probability distribution - Answer A listing of all possible outcomes or events, with a
probability (chance of occurrence) assigned to each outcome.
expected rate of return - Answer The average rate of return expected to be realized from an
investment; it is the mean value of the probability distribution of possible outcomes.
standard deviation - Answer A measure of the tightness, or variability, of a set of outcomes;
represents the total risk of an investment.
coefficient of variation (CV) - Answer A standardized measure of the risk per unit of return. It
is calculated by dividing the standard deviation by the expected return.
risk aversion - Answer Risk-averse investors require higher rates of return to invest in higher-
risk securities.
risk premium - Answer The portion of the expected return that can be attributed to the
additional risk of an investment. It is the difference between the expected rate of return on a
given risky asset and the expected rate of return on a less risky asset.
stand-alone risk - Answer The risk associated with an investment that is held by itself (in
isolation); it is the total risk associated with the investment.
expected return on a portfolio, r^p - Answer The weighted average of the expected returns
on the individual stocks held in a portfolio.
realized rate of return, r¨ - Answer The return that is actually earned. The actual return (r¨)
usually differs from the expected return (r^). (p.176)
diversification - Answer Reduction of stand-alone risk of an individual investment by
combining it with other investments in a portfolio.
correlation coefficient, ρ - Answer A measure of the degree of relationship between two
variables.
, Firm-specific - Answer That part of a security's risk associated with random outcomes
generated by events or behaviors specific to the firm. It can be eliminated through proper
diversification.
Market - Answer The part of a security's risk associated with economic, or market, factors
that systematically affect all firms to some extent. It cannot be eliminated through
diversification.
relevant risk - Answer The portion of a security's risk that cannot be diversified away; the
security's market risk. It reflects the security's contribution to the riskiness of a portfolio.
beta coefficient - Answer A measure of the extent to which the returns on a given stock move
with the stock market.
capital asset pricing model (CAPM) - Answer A model used to determine the required return
on an asset, which is based on the proposition that an asset's return should be equal to the risk-
free return plus a risk premium that reflects the asset's nondiversifiable (relevant) risk.
security market line (SML) - Answer The line that shows the relationship between risk as
measured by beta and the required rate of return for individual securities.
market risk premium (RPM) - Answer The additional return over the risk-free rate needed to
compensate investors for assuming an average amount of systematic (relevant) risk.
equilibrium - Answer The condition under which the expected return on a security is just
equal to its required return, r^=r, and the price is stable.
expected rate of return r^s - Answer The average rate of return expected to be realized from
an investment; it is the mean value of the probability distribution of possible outcomes.
Standard Deviation (SD) - Answer A measure of the tightness, or variability, of a set of
outcomes; represents the total risk of an investment.
risk premium (RP) - Answer The portion of the expected return that can be attributed to the
additional risk of an investment. It is the difference between the expected rate of return on a
given risky asset and the expected rate of return on a less risky asset.
