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COB 300B - FINANCE - EXAM 2 QUESTIONS AND ANSWERS

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COB 300B - FINANCE - EXAM 2 QUESTIONS AND ANSWERS

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COB 300B - FINANCE - EXAM 2
QUESTIONS AND ANSWERS
Diversification - Answer-The reduction of risk by investing funds
across several assets

Random diversification - Answer-randomly buying assets without regard to relevant
investment characteristics

Unique risk (nonsystematic risk or diversifiable risk) - Answer-a company-specific part of
total risk that is eliminated by
diversification

Market risk (systematic risk or beta risk) - Answer-a systematic part of total risk that
cannot be eliminated by diversification

Risk that DISAPPEARS as you diversify - Answer-• Diversifiable risk
• Nonsystematic risk
• Unique risk

Ex-post returns - Answer-Past or historical returns

Ex-ante returns - Answer-Expected returns

Income yield - Answer-return earned by investors as a periodic cash flow

Income yield formula - Answer-Expected cash flow to be received ÷ Purchase price
today

Capital gain - Answer-Measures the appreciation (or depreciation) in the price of the
asset from some starting price

Capital gain return formula - Answer-(Selling price 1 year from today − purchase price
today) ÷ purchase price today

Total return - Answer-The sum of the income yield and the capital gain yield

Total return formula - Answer-

Expected return is often based off of... - Answer-historical averages

Expected value formula - Answer-∑(outcome x probability) of each investment

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