Chapter 10 homework and solutions

Chapter 10 homework and solutions - Math 3650 Spring 2016...

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Math 3650 Spring 2016 Homework for Chapter 10 1. A common measure of the risk of a security is its volatility. Other measures of risk used in special situations (possibly insurance!) are semi-variance, and expected tail loss. Briefly define these 3 risk measures. 2. Define systematic risk and idiosynchratic risk. Which of these can be eliminated through diversification? 3. .Define the Beta of a security. 4. Under the Capital Asset Pricing Model (CAPM), what is the expected return of a security with Beta=B? 5. Under the CAPM, what is the opportunity cost of capital for investing in a project for a firm whose Beta is B, assuming the firm has no debt? 6. In looking at historical results to estimate the mean and volatility of a security, what is the standard error? How is it calculated? Answers 1. Volatility is the standard deviation of a return. Because the standard deviation (square root of the variance) of a return measures both upside and downside deviations, investors may want to use alternative measures that only examine downside deviations (“bad” outcomes).
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