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
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
