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Financial Risk Management Exam 1
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  • Financial Risk Management

Expected return - answer-a weighted average of the possible returns, where the weight applied to a particular return equals the probability of that return occurring A: the cv reflects the effects of both risk & return - answer-q: why's the coefficient of variation (cv) a better measure of stand-...

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  • November 2, 2024
  • 11
  • 2024/2025
  • Exam (elaborations)
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  • financial risk management exam 1

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  • Financial Risk Management
  • Financial Risk Management

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FINANCIAL RISK MANAGEMENT
EXAM 1




l
[COMPANY NAME] [Company address]

, Financial Risk Management Exam 1
Expected return - answer-a weighted average of the possible returns, where the weight applied
to a particular return equals the probability of that return occurring

A: the cv reflects the effects of both risk & return - answer-q: why's the coefficient of variation
(cv) a better measure of stand-alone risk that the standard deviation of an asset?

A: one that minimizes risk & maximizes expected returns - answer-q: what's an "optimal"
portfolio?

A: add additional securities to our portfolio that will move us further in a northwest direction -
answer-q: how can we form an optimal portfolio?

Efficient frontier - answer---the limit of how far we can move in a northwest direction
--represents all risk-return combo's that can be created by combining risky assets

Southeast - answer-where are individual stocks plotted with respect to the efficient frontier?

Diversification - answer-__________ allows us to create risk-return combo's that are superior to
a single stock

Return for a given level of risk
(risk for a given level of return) - answer-the efficient frontier is superior because it represents
portfolios that provide the greatest ___________ for a given level of __________ (or the least
amount of __________ for a given level of _________).

Efficient - answer-portfolios that provide the greatest return for a given level of risk are said to
be ___________

New efficient frontier - answer-the capital market line (cml) is also known as _______

Market portfolio (m) - answer-the tangency point on the cml that indicates the portfolio of risky
assets that's best to combine with the risk-free asset is known as ____

Market portfolio (m) - answer-on the cml, the ___________ is the optimal portfolio of risky
assets for all investors

Risk-free (f) & risky (m) - answer-on the cml: since all investors differ in their tolerance to risk,
they will allocate different amounts to the _______ & ________ assets

More
Less - answer-as an investor's risk aversion increases, he will allocate _______ to f and
_________ to m

Borrowing @ the risk-free rate and investing his original funds and the borrowed funds
exclusively in m - answer-on the cml: an investor can achieve points above m on the cml by
doing what?

Same portfolio

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