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Finance Flashcards

Finance Chapter 8

risk-neutral If a manager prefers a higher return investment regardless of its risk, then he is following a ________ strategy.
risk-seeking If a manager prefers investments with greater risk even if they have lower expected returns, then he is following a ________ strategy.
risk-averse If a manager requires greater return when risk increases, then he is said to be ________.
scenario analysis A common approach of estimating the variability of returns involving the forecast of pessimistic, most likely, and optimistic returns associated with an asset is called ________.
range ______ is the extent of an asset’s risk. It is found by subtracting the pessimistic outcome from the optimistic outcome.
bar chart The simplest type of probability distribution is a ________.
probability The ________ of a given outcome is its chance of occurring.
probability A(n) ________ distribution shows all possible outcomes and associated probabilities for a given event.
standard deviation A ________ measures the dispersion around the expected value.
coefficient of variation A ________ is a measure of relative dispersion used in comparing the risk of assets with differing expected returns.
lower; lower The ________ the coefficient of variation, the ________ the risk.
efficient A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.
correlation ________ is a statistical measure of the relationship between any two series of numbers.
positively; +1; negatively; -1 Perfectly ________ correlated series move exactly together and have a correlation coefficient of ________, while perfectly ________ correlated series move exactly in opposite directions and have a correlation coefficient of ________.
the same; a lower Combining negatively correlated assets having the same expected return results in a portfolio with ________ level of expected return and ________ level of risk.
diversification Combining two negatively correlated assets to reduce risk is known as ________.
nondiversifiable risk Systematic risk is also referred to as ________.
nondiversifiable risk Risk that affects all firms is called ________.
unsystematic risk The portion of an asset’s risk that is attributable to firm-specific, random causes is called ________.
systematic risk Relevant portion of an asset’s risk attributable to market factors that affect all firms is called ________.
diversifiable ________ risk represents the portion of an asset’s risk that can be eliminated by combining assets with less than perfect positive correlation.
unsystematic ____________ risk can be eliminated through diversification
diversifiable risk Strikes, lawsuits, regulatory actions, or the loss of a key account are all examples of ________.
nondiversifiable risk War, inflation, and the condition of the foreign markets are all examples of ________.
reduce risk The purpose of adding an asset with a negative or low positive beta is to ________.
is equal to 0 The beta associated with a risk-free asset ________.
total; diversifiable; nondiversifiable As randomly selected securities are combined to create a portfolio, the ________ risk of the portfolio decreases until 10 to 20 securities are included. The portion of the risk eliminated is ________ risk, while that remaining is ________ risk.
0.25 Nico wants to invest all of his money in just two assets: the risk-free asset and the market portfolio. What is Nico’s portfolio beta if he invests a quarter of his money in the market portfolio and the rest in the risk free asset?
increase; an increase; a decrease A(n) ________ in the beta coefficient normally causes ________ in the required return and therefore ________ in the price of the stock, everything else remaining the same.
nondiversifiable risk In the capital asset pricing model, the beta coefficient is a measure of ________.
market risk In the capital asset pricing model, the beta coefficient is a measure of ________.

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