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Finance COB 300 exam 3 questions and answers
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Finance COB 300 exam 3 questions and answers
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Finance COB 300 exam 3 questions andanswers
Risk - Answers -Chance that future outcomes may not turn out as expected
Ex Post Return - Answers -past or historical return
Ex Ante Return - Answers -Future or expected return
Cash Flow Yield - Answers -The ratio of the periodic cash flow to the security's price or
income yield
CF1/P0 = - Answers -Income Yield
Capital Gain or Loss Return - Answers -(P1 - P0) / P0
Measuring Risk - Answers -probability that the actual return from an investment is less
than the expected return.
More variable the possible return equals - Answers -Greater risk
Range is a measure of what? - Answers -Dispersion
what is a common measure of risk? - Answers -standard deviation
Standard Deviation is a measure of what two things? - Answers -Risk & dispersion
How does one calculate Variance? - Answers -standard deviation squared
Difference between ex post and ex ante S.D - Answers -Ex post - measure of risk for a
set of observations (past)
Ex ante - forward looking measure of risk
define Covariance - Answers -statistical measure of the degree to which two or more
series move together, or covary
Define Correlation Coefficient - Answers -statistical measure that identifies how asset
returns move in relation to one another ; (ρab)
What is the range of correlation coefficient? - Answers --1 - +1
, How can one predict, with certainty, the return of another asset? - Answers -when they
perfectly correlate
Modern Portfolio Theory - Answers -explains how rational investors, who are risk
averse, can select a set of investments that maximize the expected return for a given
level of risk
How does one get someone who is risk averse to assume additional risk? - Answers -
Require compensation as they DO NOT like risk
Efficient Portfolio - Answers -collection of investments offering:
- highest expected return for a given level of risk
- lowest risk for a given expected return
What is the curve in the "return-standard deviation" space referred to as? - Answers -
Minimum Variance Frontier
Where does the attainable portfolio lie? - Answers -Along the minimum variance frontier
Minimum Variance Portfolio - Answers -- MVP
- portfolio that lies on the efficient frontier & has the minimum amount of portfolio risk
available from any possible combination of available assets
Efficient Frontier - Answers -set of portfolios that offer the highest expected return for
their given level of risk
How do you calculate Efficient Frontier (2 steps)? - Answers -1. expected return divided
by standard deviation
2. discard the portfolio with the lowest value
How does one reduce risk? - Answers -Diversification; investing funds across several
assets.
Random Diversification - Answers -- randomly buying assets w/o regard to relevant
investment characteristics
- also known as Naive Diversification
Company-specific Unique Risk/ Non-systematic risk/ diversifiable Risk - Answers -part
of total risk that is eliminated by diversification
The part of total risk that is not eliminated by diversification is referred to as what? -
Answers -Market Risk
Systematic Risk
Nondiversifiable Risk
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