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# 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 ________.