FIN 300 : study guide

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coffeeprairie-dog40

5 May 2011

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Answers to concepts review and critical thinking questions. Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unique portion of the total risk can be eliminated at little cost. On the other hand, there are some risks that affect all investments. This portion of the total risk of an asset cannot be cost-lessly eliminated. In other words, systematic risk can be controlled, but only by a costly reduction in expected returns. If the market expected the growth rate in the coming year to be 2 percent, then there would be no change in security prices if this expectation had been fully anticipated and priced. 2 percent, and prices would rise if the anticipated growth rate had been less than 2 percent. a. b. c. d. e. f. systematic unsystematic both; probably mostly systematic unsystematic unsystematic systematic.

Related Questions

Suppose that the return on a risk-free security is 5 percent. The expected return on the market portfolio is 16 percent and the volatility of the market portfolio is 22 percent

(a) Write down the equation for CML.

(b) Consider a portfolio on CML such that the expected return on the portfolio is 14 percent. What is the volatility of this portfolio? What percentages of your portfolio you need to invest on the risk-free security and the market portfolio in order to create this portfolio (i.e., the portfolio on the CML with expected return equal to 14 percent).

c) What is the volatility of the risk-free security? What is the correlation of the return on the risk-free security and the market portfolio? Show that the beta of the risk-free security is zero.

lemonalpaca239

(3) Assume CAPM holds. Let the expected return and standard deviation of a risky security i be Âµi = 0.12 and Ïi = 0.25 respectively. The market portfolio M has the expected return ÂµM = 0.1 and standard deviation ÏM = 0.15. The risk-free rate is r = 0.06. What proportion of the risk for security i is systematic risk?

ambersnail873

Hi, giving points to help me with these questions :

1.The correlation coefficient between well diversified portfolio A (50 different assets) and well diversified portfolio B (50 different assets) is -.7.

A new portfolio of A and B together will be less risky than a portfolio that is composed of either just the assets in Portfolio A or just the assets in portfolio B.

AnswerTrue or False

2.Plastics, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2.25 percent annually. How much are you willing to pay for one share of this stock if you require a 16 percent return?

True or False

3.Assume that common stock values are consistent with the following model:

E(R_x) = r_f + B_x{E(R_m)- r_f)}

E(R_x) = required return on asset x.

r_f = risk free rate of interest

B_x = Beta of security x.

E(R_m) = expected return on market portfolio.

E(R_m)- r_f = market risk premium

4.If the risk free rate of interest increases but the required risk premium for security x remains the same; the expected return on security x be less than the required return on security x until the price of security x falls.

Answer

True or False

5.Which one of the following is the best example of unsystematic risk?

A.Inflation exceeding market expectations

Answer A.Inflation exceeding market expectations

B.A Warehouse fire

C.Decrease in the value of the dollar

D.Decrease in value of the dollar

E.Increase in Consumer spending