BA 323 SDSU EXAM 2 | ALL QUESTIONS AND
CORRECT ANSWERS | GRADED A+ | NEWEST
VERSION | VERIFIED ANSWERS
Why T-bills considered to be risk-free assets? Are they risk free? If not,
which risk factor are they exposed to? ---------CORRECT ANSWER-----------
------Considered risk-free because you're promised XYZ return regardless
of economy. They are not risk free, still exposed to inflation. Risk-free in the
default sense of the word.
Sharpe ratio equation ---------CORRECT ANSWER-----------------(return -
risk-free rate) / standard deviation
(mean Rp - Rf) / std dev Rp
Sharpe ratio of zero would be a beta of zero!
Sharpe Ratio ---------CORRECT ANSWER-----------------Reward-to-volatility
ratio; ratio of portfolio excess return to standard deviation. "How good is the
investment?" A risk-free asset would have a ratio of "0".
Higher standard deviation on a stock? ---------CORRECT ANSWER-----------
------More risky! Because there's more possible outcomes!
Risk premium ---------CORRECT ANSWER-----------------the difference
between the return on a risky asset and risk-less asset, which serves as
compensation for investor to hold riskier securities.
, Risk aversion ---------CORRECT ANSWER-----------------assumes investors
dislike risk and require higher rates of return to encourage them to hold
riskier securities.
*Though some investors like to gamble!
If two stocks have a perfect correlation, would a portfolio consisting of
these two stocks have more, less, or the same amount of risk as a portfolio
consisting of only one of these stocks? ---------CORRECT ANSWER----------
-------Same. Perfect correlation means no benefit to adding additional
security.
What correlation coefficient would an investor most want? ---------
CORRECT ANSWER-----------------As low as possible!
When do the diversification benefits of adding stocks to a portfolio tend to
decrease? ---------CORRECT ANSWER-----------------σp decreases as
stocks are added, because they would not be perfectly correlated with the
existing portfolio.
Expected return of the portfolio would remain relatively constant.
Eventually the diversification benefits of adding more stocks dissipates
(after about 40 stocks), and for large stock portfolios, σp tends to converge
to » 20%.
CAPM (Capital Asset Pricing Model) ---------CORRECT ANSWER-------------
----a model based on the proposition that any stock's required rate of return
is equal to the risk-free rate of return plus a risk premium that reflects only
the risk remaining after diversification
CORRECT ANSWERS | GRADED A+ | NEWEST
VERSION | VERIFIED ANSWERS
Why T-bills considered to be risk-free assets? Are they risk free? If not,
which risk factor are they exposed to? ---------CORRECT ANSWER-----------
------Considered risk-free because you're promised XYZ return regardless
of economy. They are not risk free, still exposed to inflation. Risk-free in the
default sense of the word.
Sharpe ratio equation ---------CORRECT ANSWER-----------------(return -
risk-free rate) / standard deviation
(mean Rp - Rf) / std dev Rp
Sharpe ratio of zero would be a beta of zero!
Sharpe Ratio ---------CORRECT ANSWER-----------------Reward-to-volatility
ratio; ratio of portfolio excess return to standard deviation. "How good is the
investment?" A risk-free asset would have a ratio of "0".
Higher standard deviation on a stock? ---------CORRECT ANSWER-----------
------More risky! Because there's more possible outcomes!
Risk premium ---------CORRECT ANSWER-----------------the difference
between the return on a risky asset and risk-less asset, which serves as
compensation for investor to hold riskier securities.
, Risk aversion ---------CORRECT ANSWER-----------------assumes investors
dislike risk and require higher rates of return to encourage them to hold
riskier securities.
*Though some investors like to gamble!
If two stocks have a perfect correlation, would a portfolio consisting of
these two stocks have more, less, or the same amount of risk as a portfolio
consisting of only one of these stocks? ---------CORRECT ANSWER----------
-------Same. Perfect correlation means no benefit to adding additional
security.
What correlation coefficient would an investor most want? ---------
CORRECT ANSWER-----------------As low as possible!
When do the diversification benefits of adding stocks to a portfolio tend to
decrease? ---------CORRECT ANSWER-----------------σp decreases as
stocks are added, because they would not be perfectly correlated with the
existing portfolio.
Expected return of the portfolio would remain relatively constant.
Eventually the diversification benefits of adding more stocks dissipates
(after about 40 stocks), and for large stock portfolios, σp tends to converge
to » 20%.
CAPM (Capital Asset Pricing Model) ---------CORRECT ANSWER-------------
----a model based on the proposition that any stock's required rate of return
is equal to the risk-free rate of return plus a risk premium that reflects only
the risk remaining after diversification
