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ECON-1006EL Study Guide - Quiz Guide: Capital Asset Pricing Model, Log-Normal Distribution, Capital Asset

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School
Laurentian
Department
Economics / Science Èconomique
Course
ECON-1006EL
Professor
Brian Mac Lean

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Document Summary

There are two forms of distributions, the normal distribution and the lognormal distribution. In the short run the return distribution is close to the normal distribution. As you see the normal distribution has no skewness and it only requires the mean and variance to describe the whole distribution. Standard deviation framework: measures the deviation of an asset fom mean. eefoe " a good meauemen of k. The key question in the portfolio theory is to find for a given level of risk the highest expected return which is possible. In order to minimize risk we have to know how the assets in our portfolio interact in between. So we have to measure the strength and direction of the linear relationship between our (two) assets. Or in other words: we have to calculate the correlation coefficient. Remember: the correlation coefficient is bound to a (-1,+1) interval. Now we going to have a look on the effect on the portfolio risk.

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Related Questions

True, false, or uncertain. (5 points each) Your grade will be based solely on your explanation.

1. Risk in economics and finance is the possibility of loss, which implies that standard deviation is an incorrect measure of risk.

2. On stock exchanges in the United States, there is only one type of order that can be placed: a market order.

3. If the efficient markets theory of stock prices is correct, technical analysis of stock prices is useless.

4. Bubbles are hard to predict.

5. According to the Capital Asset Pricing Model, the beta of a stock is the risk premium for holding a stock.

6. Internal rate of return is a better guide to choosing investments than present value.

7. A leveraged investment is riskier.

8. If Firm A has a higher beta than Firm B, then Firm A has a higher systematic risk than Firm B.

9. If firm C has a lower beta than Firm D, then Firm C has lower unsystematic (idiosyncratic) risk than Firm D.

10. A stock that is a 'castle in the air'€ has a high expected return after its price has risen.

11. The net present value of a firm to shareholders is the present value of all revenue received by the firm.

12. The internal rate of return is the discount rate that results in the NPV being positive.