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    Chapter 4: Risk and Return

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    Kim Ngân Phan
    1. Beta is a measure of the systematic risk of a security relative to the market. It is used in the capital asset pricing model to determine the expected return of a security given its risk. 2. The risk-free security has a beta of 0, while the market portfolio's beta is 1. Higher betas indicate greater systematic risk. 3. According to the information provided, the required return on Plaid Pants' stock should be 9.0% and the required return on Acme's stock should be 13.2%.

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    Chapter 4: Risk and Return

    Uploaded by

    Kim Ngân Phan
    25 views2 pages
    1. Beta is a measure of the systematic risk of a security relative to the market. It is used in the capital asset pricing model to determine the expected return of a security given its risk. 2. The risk-free security has a beta of 0, while the market portfolio's beta is 1. Higher betas indicate greater systematic risk. 3. According to the information provided, the required return on Plaid Pants' stock should be 9.0% and the required return on Acme's stock should be 13.2%.

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    1. Beta is a measure of the systematic risk of a security relative to the market. It is used in the capital asset pricing model to determine the expected return of a security given its risk. 2. The risk-free security has a beta of 0, while the market portfolio's beta is 1. Higher betas indicate greater systematic risk. 3. According to the information provided, the required return on Plaid Pants' stock should be 9.0% and the required return on Acme's stock should be 13.2%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    25 views2 pages

    Chapter 4: Risk and Return

    Uploaded by

    Kim Ngân Phan
    1. Beta is a measure of the systematic risk of a security relative to the market. It is used in the capital asset pricing model to determine the expected return of a security given its risk. 2. The risk-free security has a beta of 0, while the market portfolio's beta is 1. Higher betas indicate greater systematic risk. 3. According to the information provided, the required return on Plaid Pants' stock should be 9.0% and the required return on Acme's stock should be 13.2%.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    CHAPTER 4 : RISK AND RETURN

    1. This type of risk is avoidable through proper diversification.


    portfolio risk

    systematic risk

    unsystematic risk

    total risk
    2. A statistical measure of the degree to which two variables (e.g., securities' returns) move together.
    coefficient of variation

    variance

    covariance

    certainty equivalent

    3. An "aggressive" common stock would have a "beta"

    greater than one.

     A line that describes the relationship between an individual security's returns and returns on
    the market portfolio.
    characteristic line

    According to the capital-asset pricing model (CAPM), a security's expected (required) return
    is equal to the risk-free rate plus a premium

    based on the systematic risk of the security.


    4. The risk-free security has a beta equal to                     , while the market portfolio's beta is equal
    to                      .

    zero; one.

    5.  Beta is the slope of

    a characteristic line.

    6. A measure of "risk per unit of expected return."

    coefficient of variation
    7. The greater the beta, the            of the security involved.
    greater the unavoidable risk

    8.  Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common
    stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is
    6 percent. According to the capital-asset pricing model (CAPM) and making use of the
    information above, the required return on Plaid Pants' common stock should be         , and the
    required return on Acme's common stock should be         .
    3.6 percent; 7.2 percent

    9.6 percent; 13.2 percent

    9.0 percent; 18.0 percent

    14.0 percent; 23.0 percent

    9. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The
    market beta is, of course, 1.00 and the beta of the industry of which the company is a part is 1.10.
    If Merrill Lych were to calculate an "adjusted beta" for Espinosa's common stock, that adjusted
    beta would most likely be          .

    equal to 1.10

    10. There is a relationship between risk and return


     when risk increases, return increases
    11. Individuals or companies that prefer low-risk, low-return investments are
     risk-averse
    12. B u s i n e s s   r i s k = > is due to the variability in operating profits or cash flows
    13. Which of the following is not a measure of risk?
     correlation coefficient
    14. A portf olio having two risky securiti es can be turned risk less if 
     The securities are completely negatively correlated

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