a)
To define: Risk
a)
Explanation of Solution
Risk is nothing but the probability of any adverse occurrence of an event. In finance, risk is the probability that an investment will yield real returns or cash flows less than expected.
b)
To define: Probability distribution.
b)
Explanation of Solution
Probability distribution describes the approximate probability of each of one or more possible outcomes.
c)
To define: Standard deviation.
c)
Explanation of Solution
Standard deviation is a statistical measure of a variable’s dispersion over mean. It is an absolute risk metric, which is defined as the square root of the weighted average square deviations from the mean of individual observations.
d)
To define: Required rate of return.
d)
Explanation of Solution
Required rate of return of an investment is the level of demand for return investors, despite the investment risk.
e)
To define: Coefficient of variation.
e)
Explanation of Solution
Coefficient of variance is a measure of the inherent risk. It is defined as the ratio of any variable’s standard deviation to the mean.
f)
To define: Efficient portfolio.
f)
Explanation of Solution
A portfolio is efficient if there is no other portfolio with a greater expected return for a given standard deviation, or if there is no other portfolio with a smaller deviation for a given expected return.
g)
To define: Efficient frontier.
g)
Explanation of Solution
Efficient frontier consists of an optimal portfolio collection.
h)
To define: Capital market line.
h)
Explanation of Solution
Capital market line is a line which joins the risk-free rate and the portfolio of stocks. This shows the probability and projected returns that can be obtained by investing in probability-free investment and the stock portfolio of risky assets in different proportions of one’s wealth.
i)
To define: Beta coefficient.
i)
Explanation of Solution
Beta is one indicator of an asset or security’s systematic risk. It is nothing but the ratio of the
j)
To define:
j)
Explanation of Solution
CAPM is the Capital Asset Pricing Model, a principle that defines the risk and required return on securities and other assets.
k)
To define: Correlation coefficient.
k)
Explanation of Solution
Correlation coefficient is a general statistical measure of the degree to which two sets of numbers appear to shift or differ together, such as the returns from two securities.
l)
To define: Portfolio.
l)
Explanation of Solution
Portfolio is nothing but a series of two or more securities or assets.
m)
To define: Characteristic line.
m)
Explanation of Solution
Characteristic line is a line of regression that compares the periodic returns on holding periods on a given security to the periodic returns on the stock portfolio.
n)
To define: Security market line.
n)
Explanation of Solution
Security market line describes the relationship between systematic risk and the returns expected for individual securities.
o)
To define: Covariance.
o)
Explanation of Solution
Covariance is an absolute statistical measure of the degree to which two series of numbers appear to travel together or differ.
p)
To define: Systematic risk.
p)
Explanation of Solution
Systematic risk is the portion of the volatility in the return of a security that is caused by conditions that influence the entire market. It is also called as non-diversifiable risk.
q)
To define: Unsystematic risk.
q)
Explanation of Solution
Unsystematic risks are the threats specific to an organization. These risks are also called as diversifiable risks.
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Chapter 8 Solutions
CONTEMP.FINANCIAL MGMT. (LL)-W/MINDTAP
- What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.arrow_forwardWhich of the following measures reflects the excess return earned on a portfolio per unit of its systematic risk a. Treynor’s measure b. Sharpe’s measure c. Jensen’s measure d. Total measurearrow_forwardWhich of the following measures the total risk of a portfolio? A. Standard Deviation B. Correlation Coefficient C. Beta D. Alphaarrow_forward
- The security market line depicts: a. Expected return as a function of systematic risk (indicated by beta) b. The market portfolio as the optimal portfolio of risky assets c. The relationship between a security’s return and the return on the index d. Portfolio combinations of the market portfolio and the risk-free asset e. Expected return as a function of volatilityarrow_forwardWhich one of the following is the formula that explains the relationship between the expected returnon a security and the level of that security's systematic risk?Select one:a. Time value of money equationb. Unsystematic risk equationc. Expected risk formulad. Market performance equatione. Capital asset pricing modelarrow_forwardWhat is a risk measure? a Alpha b Required return on the market portfolio c Standard deviation of historical returnsarrow_forward
- Market's Risk premium measures Select one: a. The market return plus the risk free rate. b. The risk free rate and market portfolio rate of return c. The risk free rate plus the risk premium d. The change in the risk free rate and the market return e. The difference between return on market portfolio and risk-free ratearrow_forwardb) Give a graphical example to present the positioning of. E Systematic risk E Risk free rate of returm E Market rate of return, and E Risk premium.arrow_forwardThe risk associated with the overall market is referred to as _____ risk. a. unsystematic b. diversified c. portfolio d. systematicarrow_forward
- Make a simple example of the following: a. Capital Gain (or Losses) b. Expected Return c. Real Return d. Risk-free Return e. Required Return f. Holding Period Returnarrow_forwardStandard deviation of portfolio returns is a measure of ___________. Group of answer choices total risk systematic risk market risk firm-specific risk unsystematic riskarrow_forwardThe measure of risk for a security held in a diversified portfolio is:a. Specific risk.b. Standard deviation of returns.c. Reinvestment risk.d. Covariance.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTIntermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning