Ch 3: Risk and Return EOC Problems

A good measure of an investor’s risk exposure if she/he only holds a single asset in her portfolio is:

the standard deviation of possible returns on the asset

In terms of risk, labor union disputes, entry of a new competitor, and embezzlement by management are all examples of factors affecting:

diversifiable risk

The standard deviation is a:

numerical indicator of how widely dispersed possible values are distributed

around the mean

When we compare the risk of two investments that have the same expected return, the coefficient of variation:

provides no additional information when compared with the standard deviation

Currently XYZ Company has a required return of 12% and a beta of 1.2. According to the CAPM, XYZ is:

more risky than the market

Beta is best described as a measure of:

nondiversifiable risk

If two variables are perfectly positively correlated, it means:

they change linearly in perfect lockstep

You are considering investing in Digital Consolidated’s common stock. Based on your perception of Digital’s riskiness, you will require a return of 8.5% on their stock. Digital’s most recent beta is 1.20. The risk-free rate is currently 3.25%, while the market return is currently 7.75%. Based on these data, should you invest in Digital's stock?

Yes, because Digital’s expected return exceeds your required return.