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What are the components of the risk premium?
- Business risk
- Exchange rate risk
- Financial Risk
- Liquidity Risk
- Exchange rate risk
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The ability to sell an asset quickly at a fair price is associated with?
Liquidity Risk
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The variability of operating earnings is associated with?
Business risk.
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The uncertainty of investment returns associated with how a firm finances its investments is known as?
Financial Risk.
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What will happen to the security market line (SML) if the following events occur, other things constant: (1) inflation expectations increase, and (2) investors become more risk averse?
Shift up and have a steeper slope
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A decrease in the market risk premium, all other things constant, will cause the security market line to?
Have a flatter slope
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Assume you bought 100 shares of New Tech common stock on January 15, 2003 at $50.00 per share and sold it on January 15, 2004 for $40.00 per share. What was your holding period yield?
HPR = (40/50) - 1 = -20%
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In a price weighted average stock market indicator index, the following type of stock has the
greatest influence?
The stock with the highest price
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What effect does a stock substitution or stock split have on a price-weighted index?
Index remains the same, divisor will increase/decrease.
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What is not a value-weighted index?
Dow Jones Industrial Average
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An example of a value weighted stock market indicator index is the?
S & P 500 Index.
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In a value weighted index?
Large companies have a disproportionate influence on the index.
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What is the most comprehensive list of stocks?
Wilshire Equity Index
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What is not a global equity indicator series?
Merrill Lynch-Wilshire World Indexes
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The Ryan Treasury Index is an example of a?
Bond market indicator series.
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What makes it difficult to create and maintain a bond index?
- The universe of bonds is broader than stocks.
- The universe of bonds is constantly changing due to new issues, bond maturities, calls, and bond sinking funds.
- It is difficult to derive value, up-to-date prices.
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Examples of Style Indexes?
- Small-cap growth
- Mid-cap value
- Small-cap value
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Studies of correlations among monthly U.S. bond price index returns have found?
Low correlations between investment grade bonds and high yield bonds.
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In a two-stock portfolio, if the correlation coefficient between two stocks were to decrease over
time every thing else remaining constant the portfolio's risk would?
Decrease
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Given a portfolio of stocks, the envelope curve containing the set of best possible combinations is
known as the?
Efficient frontier
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A portfolio is considered to be efficient if?
- No other portfolio offers higher expected returns with the same risk.
- No other portfolio offers lower risk with the same expected return.
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The optimal portfolio is identified at the point of tangency between the efficient frontier and the?
Highest possible utility curve.
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An individual investor's utility curves specify the tradeoffs he or she is willing to make between?
Return and risk.
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As the correlation coefficient between two assets decreases, the shape of the efficient frontier?
Bends in.
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A positive covariance between two variables indicates that?
The two variables move in the same direction.
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A positive relationship between expected return and expected risk is consistent with?
Investors being risk averse.
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