FINA 3000 POPE UGA TEST 2 EXAM
RATED A+ FOR SUCCESS
What is risk? - ANSWERThe probability that actual future returns will deviate from
expected returns
What does risk represent - ANSWERThe variability of returns
What does risk imply? - ANSWERA chance for some unfavorable event to occur
What are examples of risk? - ANSWERUncertainty in net income caused by revenue,
labor cost, inventory, or exchange rate
What is average return? - ANSWERAverage % return on investment over a sample time
period
What is variance? - ANSWERHow far do returns fall from the mean or average
What is a return? - ANSWERThe interest or % that we earn over a time period (typically
a year or month
If variance increases, what happens to risk (volatility) - ANSWERIt increases
What formula do you use if calculating annual return? - ANSWERE(R)
What does the E(R) formula represent? - ANSWERThe capital gain + the dividend yield
What does Rhp find? - ANSWERThe total compounded interest earned over a time
period of investment
What does Rgeo find? - ANSWERAnnual compounded return
A Random Variable - ANSWERSome measurement that can have a number of possible
future outcomes
Examples of Random Variables - ANSWERTemp, sales, expenses
What is a probability distribution - ANSWERA function that assigns probabilities to the
various possible outcomes that a random variable can have
What are the two forms of probability distributions? - ANSWERDiscrete ad Continuous
How many possible outcomes are there in a discrete distribution? - ANSWERFinite
, How many possible outcomes are there in a continuous distribution? - ANSWERInfinite
What must probabilities add up to? - ANSWER1
What can we use a distribution to calculate? - ANSWERExpected value and variance
What does variance measure? - ANSWERThe spread of the distribution or variation in
possible outcomes about the expected value
68%, 95%, 99.7% - ANSWER1 SD from mean, 2 SD from mean, 3 SD from mean
Name the two sources for return on a stock - ANSWERGain in price (capital gain) and
any dividend paid
What can standard deviation also be called? - ANSWERStand Alone Risk which implies
the risk associated with only investing in that stock
If two stocks have the same E(R), what can we use to compare them? - ANSWERThe
SD.
Assuming E(R)s are equal, what does the SD tell one about risk? - ANSWERThe
greater the SD, the more risky; so we would choose the stock with a smaller SD
If two stocks have different E(R), how do we measure risk? - ANSWERUsing the
coefficient of variation formula. We will take the stock with the smallest COV
COV Formula - ANSWERCOV= SD/Mean
What is a portfolio? - ANSWERA collection of two or more assests
What is the goal of a portfolio? - ANSWERTo increase assets and decrease risk of
portfolio
What does correlation measure? - ANSWERHow much two variables move or vary
together
What can one infer about positively correlated stocks? - ANSWERThe stocks tend to
move together. This means if stock A is above its average, stock B tends to also be
above its average
In reality, all stocks are ___ correlated because... - ANSWERPositively; because macro
economic events move all stocks in the same direction
What can one infer about negatively correlated stocks? - ANSWERStock returns tend to
move in opposite directions. This means if stock A is above average, stock B is
probably below average.
RATED A+ FOR SUCCESS
What is risk? - ANSWERThe probability that actual future returns will deviate from
expected returns
What does risk represent - ANSWERThe variability of returns
What does risk imply? - ANSWERA chance for some unfavorable event to occur
What are examples of risk? - ANSWERUncertainty in net income caused by revenue,
labor cost, inventory, or exchange rate
What is average return? - ANSWERAverage % return on investment over a sample time
period
What is variance? - ANSWERHow far do returns fall from the mean or average
What is a return? - ANSWERThe interest or % that we earn over a time period (typically
a year or month
If variance increases, what happens to risk (volatility) - ANSWERIt increases
What formula do you use if calculating annual return? - ANSWERE(R)
What does the E(R) formula represent? - ANSWERThe capital gain + the dividend yield
What does Rhp find? - ANSWERThe total compounded interest earned over a time
period of investment
What does Rgeo find? - ANSWERAnnual compounded return
A Random Variable - ANSWERSome measurement that can have a number of possible
future outcomes
Examples of Random Variables - ANSWERTemp, sales, expenses
What is a probability distribution - ANSWERA function that assigns probabilities to the
various possible outcomes that a random variable can have
What are the two forms of probability distributions? - ANSWERDiscrete ad Continuous
How many possible outcomes are there in a discrete distribution? - ANSWERFinite
, How many possible outcomes are there in a continuous distribution? - ANSWERInfinite
What must probabilities add up to? - ANSWER1
What can we use a distribution to calculate? - ANSWERExpected value and variance
What does variance measure? - ANSWERThe spread of the distribution or variation in
possible outcomes about the expected value
68%, 95%, 99.7% - ANSWER1 SD from mean, 2 SD from mean, 3 SD from mean
Name the two sources for return on a stock - ANSWERGain in price (capital gain) and
any dividend paid
What can standard deviation also be called? - ANSWERStand Alone Risk which implies
the risk associated with only investing in that stock
If two stocks have the same E(R), what can we use to compare them? - ANSWERThe
SD.
Assuming E(R)s are equal, what does the SD tell one about risk? - ANSWERThe
greater the SD, the more risky; so we would choose the stock with a smaller SD
If two stocks have different E(R), how do we measure risk? - ANSWERUsing the
coefficient of variation formula. We will take the stock with the smallest COV
COV Formula - ANSWERCOV= SD/Mean
What is a portfolio? - ANSWERA collection of two or more assests
What is the goal of a portfolio? - ANSWERTo increase assets and decrease risk of
portfolio
What does correlation measure? - ANSWERHow much two variables move or vary
together
What can one infer about positively correlated stocks? - ANSWERThe stocks tend to
move together. This means if stock A is above its average, stock B tends to also be
above its average
In reality, all stocks are ___ correlated because... - ANSWERPositively; because macro
economic events move all stocks in the same direction
What can one infer about negatively correlated stocks? - ANSWERStock returns tend to
move in opposite directions. This means if stock A is above average, stock B is
probably below average.
