Corporate Finance Chapter 7,8, 13 and 14 Study Guide

Corporate Finance Chapter 7,8, 13 and 14 Study Guide -...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 7 1. Treasury bills typically provide higher average returns, both in nominal terms and in real terms, than long-term government bonds. 2. A risk premium is the difference between a security's return and the Treasury bill return. 3. For lognormally distributed returns, the annual geometric average return is greater than the arithmetic average return. 4. According to the authors, a reasonable range for the risk premium in the United States is 5% to 8%. 5. The standard statistical measures of the variability of stock returns are beta and covariance. 6. Diversification reduces the risk of a portfolio because the prices of different securities do not move exactly together. 7. The portfolio risk that cannot be eliminated by diversification is called unique risk. 8. The portfolio risk that cannot be eliminated by diversification is called market risk. 9. The beta of a well-diversified portfolio is equal to the value weighted average beta of the securities included in the portfolio. 10. The average beta of all stocks in the market is zero.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
11. A portfolio with a beta of one offers an expected return equal to the market risk premium. 12. Stocks with high standard deviations will necessarily also have high betas. 13. Low standard deviation stocks always have low betas. 14. A stock having a covariance with the market that is higher than the variance of the market will always have a beta above 1.0. 15. By purchasing U.S. government bonds, an investor can achieve both a risk-free nominal rate of return and a risk-free real rate of return. 16. A risk premium generated by comparing stocks to 10-year U.S. Treasury bonds will be smaller than a risk premium generated by comparing stocks to U.S. Treasury bills. 17. One can easily calculate the estimated risk premium on stocks via the statistical analysis of historical stock returns.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern