# Ch 07 - CHAPTER 7 ANALYSIS OF RISK AND RETURN ANSWERS TO...

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CHAPTER 7 ANALYSIS OF RISK AND RETURN ANSWERS TO END OF CHAPTER QUESTIONS: 1. a. A probability distribution defines the percentage chance of occurrence of each of one or more possible outcomes. b. The standard deviation is a statistical measure of the dispersion of a variable about the mean. It is measured as the square root of the weighted average squared deviations of individual observations from the mean. c. The required rate of return of an investment is the level of return investors demand, given the risk of the investment. d. Systematic risk is that portion of the variability in a security's return that is caused by factors affecting the market as a whole. It is also called nondiversifiable risk or market risk. e. Unsystematic risk is risk that is unique to a firm. It is also called diversifiable risk. f. A portfolio is a collection of two or more assets or securities. g. The security market line defines the relationship between systematic risk and the required return for any asset. h. The characteristic line is a regression line relating the periodic holding period returns for a specific security to the periodic holding period returns on the market portfolio. i. State of nature refers to the particular event or combination of events that determines the outcome of a particular variable such as the return on a stock. For example, the return on a stock may be impacted by the different states of nature of the economy— excellent, moderate, and poor. 2. Objective distributions are probability distributions based on objective data such as historical data (e.g., historical stock returns or prices). Subjective distributions are based on subjective data such the opinion of an individual (e.g., stock price forecast of an analyst) . 3. U.S. government bonds (Treasury bonds) are considered risk-free because they are, for all intents and purposes, free of default risk . In this sense, the holder of a U.S. Treasury security need not be concerned that the U.S. government will not pay the interest or principal obligation due on the security. 4. Systematic risk refers to that portion of the variability of an individual security's return that is caused by factors affecting the market as a whole. It is usually measured by the security's "beta" value.

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Ch 07 - CHAPTER 7 ANALYSIS OF RISK AND RETURN ANSWERS TO...

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