FINA 3000 POPE UGA TEST 2 QUESTIONS WITH
VERIFIED ACCURATE ANSWERS
What is risk? - Answers - The probability that actual future returns will deviate from
expected returns
What does risk represent - Answers - The variability of returns
What does risk imply? - Answers - A chance for some unfavorable event to occur
What are examples of risk? - Answers - Uncertainty in net income caused by revenue,
labor cost, inventory, or exchange rate
What is average return? - Answers - Average % return on investment over a sample
time period
What is variance? - Answers - How far do returns fall from the mean or average
What is a return? - Answers - The interest or % that we earn over a time period
(typically a year or month
If variance increases, what happens to risk (volatility) - Answers - It increases
What formula do you use if calculating annual return? - Answers - E(R)
What does the E(R) formula represent? - Answers - The capital gain + the dividend yield
What does Rhp find? - Answers - The total compounded interest earned over a time
period of investment
What does Rgeo find? - Answers - Annual compounded return
A Random Variable - Answers - Some measurement that can have a number of
possible future outcomes
Examples of Random Variables - Answers - Temp, sales, expenses
What is a probability distribution - Answers - A function that assigns probabilities to the
various possible outcomes that a random variable can have
What are the two forms of probability distributions? - Answers - Discrete ad Continuous
How many possible outcomes are there in a discrete distribution? - Answers - Finite
, How many possible outcomes are there in a continuous distribution? - Answers - Infinite
What must probabilities add up to? - Answers - 1
What can we use a distribution to calculate? - Answers - Expected value and variance
What does variance measure? - Answers - The spread of the distribution or variation in
possible outcomes about the expected value
68%, 95%, 99.7% - Answers - 1 SD from mean, 2 SD from mean, 3 SD from mean
Name the two sources for return on a stock - Answers - Gain in price (capital gain) and
any dividend paid
What can standard deviation also be called? - Answers - Stand 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? - Answers - The
SD.
Assuming E(R)s are equal, what does the SD tell one about risk? - Answers - The
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? - Answers - Using the
coefficient of variation formula. We will take the stock with the smallest COV
COV Formula - Answers - COV= SD/Mean
What is a portfolio? - Answers - A collection of two or more assests
What is the goal of a portfolio? - Answers - To increase assets and decrease risk of
portfolio
What does correlation measure? - Answers - How much two variables move or vary
together
What can one infer about positively correlated stocks? - Answers - The 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... - Answers - Positively; because macro
economic events move all stocks in the same direction
VERIFIED ACCURATE ANSWERS
What is risk? - Answers - The probability that actual future returns will deviate from
expected returns
What does risk represent - Answers - The variability of returns
What does risk imply? - Answers - A chance for some unfavorable event to occur
What are examples of risk? - Answers - Uncertainty in net income caused by revenue,
labor cost, inventory, or exchange rate
What is average return? - Answers - Average % return on investment over a sample
time period
What is variance? - Answers - How far do returns fall from the mean or average
What is a return? - Answers - The interest or % that we earn over a time period
(typically a year or month
If variance increases, what happens to risk (volatility) - Answers - It increases
What formula do you use if calculating annual return? - Answers - E(R)
What does the E(R) formula represent? - Answers - The capital gain + the dividend yield
What does Rhp find? - Answers - The total compounded interest earned over a time
period of investment
What does Rgeo find? - Answers - Annual compounded return
A Random Variable - Answers - Some measurement that can have a number of
possible future outcomes
Examples of Random Variables - Answers - Temp, sales, expenses
What is a probability distribution - Answers - A function that assigns probabilities to the
various possible outcomes that a random variable can have
What are the two forms of probability distributions? - Answers - Discrete ad Continuous
How many possible outcomes are there in a discrete distribution? - Answers - Finite
, How many possible outcomes are there in a continuous distribution? - Answers - Infinite
What must probabilities add up to? - Answers - 1
What can we use a distribution to calculate? - Answers - Expected value and variance
What does variance measure? - Answers - The spread of the distribution or variation in
possible outcomes about the expected value
68%, 95%, 99.7% - Answers - 1 SD from mean, 2 SD from mean, 3 SD from mean
Name the two sources for return on a stock - Answers - Gain in price (capital gain) and
any dividend paid
What can standard deviation also be called? - Answers - Stand 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? - Answers - The
SD.
Assuming E(R)s are equal, what does the SD tell one about risk? - Answers - The
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? - Answers - Using the
coefficient of variation formula. We will take the stock with the smallest COV
COV Formula - Answers - COV= SD/Mean
What is a portfolio? - Answers - A collection of two or more assests
What is the goal of a portfolio? - Answers - To increase assets and decrease risk of
portfolio
What does correlation measure? - Answers - How much two variables move or vary
together
What can one infer about positively correlated stocks? - Answers - The 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... - Answers - Positively; because macro
economic events move all stocks in the same direction
