Chp11_ReviewAnswers

Chp11_ReviewAnswers - Thus, the risk of the portfolio is...

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Chapter 11 Systematic Risk and the Equity Risk Premium Answers to Chapter 11 Review Questions 1. To compute the expected return of a portfolio, one needs the expected returns of each asset in the portfolio and the weight of each asset in the portfolio. 2. Correlation tells us how the returns of two assets move relative to one another. A correlation of 1 tells us that when Stock A goes up, Stock B always goes up. A correlation of - 1 tells us that when Stock A goes up, Stock B always goes down. 3. The risk of the portfolio is not simply the weighted average of the risks of the securities in the portfolio, because diversification eliminates the independent risks of the securities in the portfolio.
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Unformatted text preview: Thus, the risk of the portfolio is actually less than the weighted average of the risks of the securities in the portfolio. 4. Beta measures the sensitivity of the returns of a portfolio or security to the fluctuations of the market portfolio. We use beta to measure the systematic risk of an asset or portfolio. 5. The CAPM says that systematic risk drives the expected returns of an asset. 6. The security market line describes the relation between systematic risk and expected return....
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This note was uploaded on 08/26/2010 for the course FINA FINA111 taught by Professor Lynnpi during the Spring '09 term at HKUST.

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