FINA 3000 Pope UGA Test 2 questions and solutions
What is risk? - answersThe probability that actual future returns will deviate from expected returns
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What does risk represent - answersThe variability of returns
ji ji ji ji ji ji ji ji
What does risk imply? - answersA chance for some unfavorable event to occur
ji ji ji ji ji ji ji ji ji ji ji ji
What are examples of risk? - answersUncertainty in net income caused by revenue, labor cost, inventory, or
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
exchange rate
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What is average return? - answersAverage % return on investment over a sample time period
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What is variance? - answersHow far do returns fall from the mean or average
ji ji ji ji ji ji ji ji ji ji ji ji ji
What is a return? - answersThe interest or % that we earn over a time period (typically a year or month
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
If variance increases, what happens to risk (volatility) - answersIt increases
ji ji ji ji ji ji ji ji ji ji
What formula do you use if calculating annual return? - answersE(R)
ji ji ji ji ji ji ji ji ji ji
What does the E(R) formula represent? - answersThe capital gain + the dividend yield
ji ji ji ji ji ji ji ji ji ji ji ji ji
What does Rhp find? - answersThe total compounded interest earned over a time period of investment
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What does Rgeo find? - answersAnnual compounded return
ji ji ji ji ji ji ji
A Random Variable - answersSome measurement that can have a number of possible future outcomes
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
Examples of Random Variables - answersTemp, sales, expenses
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What is a probability distribution - answersA function that assigns probabilities to the various possible
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
outcomes that a random variable can have
ji ji ji ji ji ji ji
What are the two forms of probability distributions? - answersDiscrete ad Continuous
ji ji ji ji ji ji ji ji ji ji ji
How many possible outcomes are there in a discrete distribution? - answersFinite
ji ji ji ji ji ji ji ji ji ji ji
How many possible outcomes are there in a continuous distribution? - answersInfinite
ji ji ji ji ji ji ji ji ji ji ji
What must probabilities add up to? - answers1
ji ji ji ji ji ji ji
What can we use a distribution to calculate? - answersExpected value and variance
ji ji ji ji ji ji ji ji ji ji ji ji
What does variance measure? - answersThe spread of the distribution or variation in possible outcomes
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
about the expected value
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68%, 95%, 99.7% - answers1 SD from mean, 2 SD from mean, 3 SD from mean
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
, Name the two sources for return on a stock - answersGain in price (capital gain) and any dividend paid
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What can standard deviation also be called? - answersStand Alone Risk which implies the risk associated
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
with only investing in that stock
ji ji ji ji ji ji
If two stocks have the same E(R), what can we use to compare them? - answersThe SD.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
Assuming E(R)s are equal, what does the SD tell one about risk? - answersThe greater the SD, the more risky;
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
so we would choose the stock with a smaller SD
ji ji ji ji ji ji ji ji ji ji
If two stocks have different E(R), how do we measure risk? - answersUsing the coefficient of variation
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
formula. We will take the stock with the smallest COV
ji ji ji ji ji ji ji ji ji ji
COV Formula - answersCOV= SD/Mean
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What is a portfolio? - answersA collection of two or more assests
ji ji ji ji ji ji ji ji ji ji ji
What is the goal of a portfolio? - answersTo increase assets and decrease risk of portfolio
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What does correlation measure? - answersHow much two variables move or vary together
ji ji ji ji ji ji ji ji ji ji ji ji
What can one infer about positively correlated stocks? - answersThe stocks tend to move together. This
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
means if stock A is above its average, stock B tends to also be above its average
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
In reality, all stocks are ___ correlated because... - answersPositively; because macro economic events
ji ji ji ji ji ji ji ji ji ji ji ji ji
move all stocks in the same direction
ji ji ji ji ji ji ji
What can one infer about negatively correlated stocks? - answersStock returns tend to move in opposite
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
directions. This means if stock A is above average, stock B is probably below average.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
When decreasing correlation, what happens to the SD - answersIt also deceases because it is more
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
diversified
ji
T/F: We can remove all risk - answersFalse
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What does correlation capture? - answersIt identifies that stand alone risk for a firm can be divided into
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
market-wide risk and firm-specific risk
ji ji ji ji ji
What is Market Wide Risk? - answersMarket events like: recessions, booms, changes in interest rates, taxes,
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
politics, oil prices, wars; cause all stocks to move up or down together "High tide raises all-risk"
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What is Market Risk is also known as? - answersNon-diversifiable risk, systematic risk, relevant, rewardable
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What is firm specific risk? - answerseconomic and business events like: volatility due to an event unique to
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
firm or industry; that impact only one or a few firms at a time
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What is Firm Specific Risk also known as? - answersNon-systematic or diversifiable risk
ji ji ji ji ji ji ji ji ji ji ji ji
What kind of risk should investors be rewarded for? - answersNon-diversifiable
ji ji ji ji ji ji ji ji ji ji
What is risk? - answersThe probability that actual future returns will deviate from expected returns
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What does risk represent - answersThe variability of returns
ji ji ji ji ji ji ji ji
What does risk imply? - answersA chance for some unfavorable event to occur
ji ji ji ji ji ji ji ji ji ji ji ji
What are examples of risk? - answersUncertainty in net income caused by revenue, labor cost, inventory, or
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
exchange rate
ji ji
What is average return? - answersAverage % return on investment over a sample time period
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What is variance? - answersHow far do returns fall from the mean or average
ji ji ji ji ji ji ji ji ji ji ji ji ji
What is a return? - answersThe interest or % that we earn over a time period (typically a year or month
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
If variance increases, what happens to risk (volatility) - answersIt increases
ji ji ji ji ji ji ji ji ji ji
What formula do you use if calculating annual return? - answersE(R)
ji ji ji ji ji ji ji ji ji ji
What does the E(R) formula represent? - answersThe capital gain + the dividend yield
ji ji ji ji ji ji ji ji ji ji ji ji ji
What does Rhp find? - answersThe total compounded interest earned over a time period of investment
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What does Rgeo find? - answersAnnual compounded return
ji ji ji ji ji ji ji
A Random Variable - answersSome measurement that can have a number of possible future outcomes
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
Examples of Random Variables - answersTemp, sales, expenses
ji ji ji ji ji ji ji
What is a probability distribution - answersA function that assigns probabilities to the various possible
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
outcomes that a random variable can have
ji ji ji ji ji ji ji
What are the two forms of probability distributions? - answersDiscrete ad Continuous
ji ji ji ji ji ji ji ji ji ji ji
How many possible outcomes are there in a discrete distribution? - answersFinite
ji ji ji ji ji ji ji ji ji ji ji
How many possible outcomes are there in a continuous distribution? - answersInfinite
ji ji ji ji ji ji ji ji ji ji ji
What must probabilities add up to? - answers1
ji ji ji ji ji ji ji
What can we use a distribution to calculate? - answersExpected value and variance
ji ji ji ji ji ji ji ji ji ji ji ji
What does variance measure? - answersThe spread of the distribution or variation in possible outcomes
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
about the expected value
ji ji ji ji
68%, 95%, 99.7% - answers1 SD from mean, 2 SD from mean, 3 SD from mean
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
, Name the two sources for return on a stock - answersGain in price (capital gain) and any dividend paid
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What can standard deviation also be called? - answersStand Alone Risk which implies the risk associated
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
with only investing in that stock
ji ji ji ji ji ji
If two stocks have the same E(R), what can we use to compare them? - answersThe SD.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
Assuming E(R)s are equal, what does the SD tell one about risk? - answersThe greater the SD, the more risky;
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
so we would choose the stock with a smaller SD
ji ji ji ji ji ji ji ji ji ji
If two stocks have different E(R), how do we measure risk? - answersUsing the coefficient of variation
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
formula. We will take the stock with the smallest COV
ji ji ji ji ji ji ji ji ji ji
COV Formula - answersCOV= SD/Mean
ji ji ji ji
What is a portfolio? - answersA collection of two or more assests
ji ji ji ji ji ji ji ji ji ji ji
What is the goal of a portfolio? - answersTo increase assets and decrease risk of portfolio
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What does correlation measure? - answersHow much two variables move or vary together
ji ji ji ji ji ji ji ji ji ji ji ji
What can one infer about positively correlated stocks? - answersThe stocks tend to move together. This
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
means if stock A is above its average, stock B tends to also be above its average
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
In reality, all stocks are ___ correlated because... - answersPositively; because macro economic events
ji ji ji ji ji ji ji ji ji ji ji ji ji
move all stocks in the same direction
ji ji ji ji ji ji ji
What can one infer about negatively correlated stocks? - answersStock returns tend to move in opposite
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
directions. This means if stock A is above average, stock B is probably below average.
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
When decreasing correlation, what happens to the SD - answersIt also deceases because it is more
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
diversified
ji
T/F: We can remove all risk - answersFalse
ji ji ji ji ji ji ji
What does correlation capture? - answersIt identifies that stand alone risk for a firm can be divided into
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
market-wide risk and firm-specific risk
ji ji ji ji ji
What is Market Wide Risk? - answersMarket events like: recessions, booms, changes in interest rates, taxes,
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
politics, oil prices, wars; cause all stocks to move up or down together "High tide raises all-risk"
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What is Market Risk is also known as? - answersNon-diversifiable risk, systematic risk, relevant, rewardable
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What is firm specific risk? - answerseconomic and business events like: volatility due to an event unique to
ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji ji
firm or industry; that impact only one or a few firms at a time
ji ji ji ji ji ji ji ji ji ji ji ji ji ji
What is Firm Specific Risk also known as? - answersNon-systematic or diversifiable risk
ji ji ji ji ji ji ji ji ji ji ji ji
What kind of risk should investors be rewarded for? - answersNon-diversifiable
ji ji ji ji ji ji ji ji ji ji
