FIN 341 Exam 3 Review | Questions with 100%
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2026/2027
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Terms in this set (31)
expected return vs. required return > expected - anticipated return on investment
vs. actual return > required - minimum return investor demands to
compensate for risk they're taking
> actual - historical return realized on investment
over specific period
all investors are: > RISK-AVERSE (dislike risk & require higher RRR as
inducement to buy riskier securities)
--
> in presence of risk, investors demand RISK
PREMIUM (difference in returns (actual &
expected); compensation for taking on risk)
> rational investors form portfolios
risk > aka variability, PRB that actual return DOESN'T
equal expected
> measured by σ (measure of how far actual return
is likely to deviate from expected)
, σ > σ = √Σ(ri - r̂ )^2 * pi
--
> ri = RRR
> r̂ = expected return
> pi = PRB
--
> to solve:
1. (ri - r̂ )
2. (ri - r̂ )^2
3. (ri - r̂ )^2 * pi = VARIANCE
4. add all
5. square root sum
(2) types of risk > DIVERSIFIABLE
- company-specific (unique to co.'s stocks)
- can be eliminated when combined w/ other
stocks (IRRELEVANT risk)
- caused by random, unsystematic events (ex:
kroger's management quality, choice of new
locations, unionized workforce)
--
> MKT
- affects ALL co.s (RELEVANT risk)
- can't get rid of no matter how many stocks u add
(non-diversifiable)
- requires compensation (risk premium)
- caused by systematic events (ex: impact of
recession, inflation, COVID, incr in int rates)
Correct Answers | Verified | Latest Update
2026/2027
Save
Terms in this set (31)
expected return vs. required return > expected - anticipated return on investment
vs. actual return > required - minimum return investor demands to
compensate for risk they're taking
> actual - historical return realized on investment
over specific period
all investors are: > RISK-AVERSE (dislike risk & require higher RRR as
inducement to buy riskier securities)
--
> in presence of risk, investors demand RISK
PREMIUM (difference in returns (actual &
expected); compensation for taking on risk)
> rational investors form portfolios
risk > aka variability, PRB that actual return DOESN'T
equal expected
> measured by σ (measure of how far actual return
is likely to deviate from expected)
, σ > σ = √Σ(ri - r̂ )^2 * pi
--
> ri = RRR
> r̂ = expected return
> pi = PRB
--
> to solve:
1. (ri - r̂ )
2. (ri - r̂ )^2
3. (ri - r̂ )^2 * pi = VARIANCE
4. add all
5. square root sum
(2) types of risk > DIVERSIFIABLE
- company-specific (unique to co.'s stocks)
- can be eliminated when combined w/ other
stocks (IRRELEVANT risk)
- caused by random, unsystematic events (ex:
kroger's management quality, choice of new
locations, unionized workforce)
--
> MKT
- affects ALL co.s (RELEVANT risk)
- can't get rid of no matter how many stocks u add
(non-diversifiable)
- requires compensation (risk premium)
- caused by systematic events (ex: impact of
recession, inflation, COVID, incr in int rates)
