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SDSU BA 323 FINANCE EXAM 2 NEWEST 2025 ACTUAL
EXAM COMPLETE QUESTIONS AND CORRECT
DETAILED ANSWERS (VERIFIED ANSWERS) |A+
GRADED
Why T-bills considered to be risk-free assets? Are they risk free?If not, which risk factor are they exposed to? - ANSWER- Considered risk-free because you're promised XYZ return regardless of economy. They are not risk free, still exposed to inflation. Risk-free in the default sense of the word.
Sharpe ratio equation - ANSWER-(return - risk-free rate) / standard deviation
(mean Rp - Rf) / std dev Rp
Sharpe ratio of zero would be a beta of zero!
Sharpe Ratio - ANSWER-Reward-to-volatility ratio; ratio of portfolio excess return to standard deviation. "How good is the investment?" A risk-free asset would have a ratio of "0".
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Higher standard deviation on a stock? - ANSWER-More risky!Because there's more possible outcomes!
risk premium - ANSWER-the difference between the return on a risky asset and risk-less asset, which serves as compensation for investor to hold riskier securities.
risk aversion - ANSWER-assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities.
*Though some investors like to gamble!
If two stocks have a perfect correlation, would a portfolio consisting of these two stocks have more, less, or the same amount of risk as a portfolio consisting of only one of these stocks? - ANSWER-Same. Perfect correlation means no benefit to adding additional security.
What correlation coefficient would an investor most want? - ANSWER-As low as possible!
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When do the diversification benefits of adding stocks to a portfolio tend to decrease? - ANSWER-σp decreases as stocks are added, because they would not be perfectly correlated with the existing portfolio.
Expected return of the portfolio would remain relatively constant.
Eventually the diversification benefits of adding more stocks dissipates (after about 40 stocks), and for large stock portfolios, σp tends to converge to » 20%.
CAPM (Capital Asset Pricing Model) - ANSWER-a model based on the proposition that any stock's required rate of return is equal to the risk-free rate of return plus a risk premium that reflects only the risk remaining after diversification
(beta) r(i) = r(RF) + (rM-rRF)b(i)
- (rM-rRF) is market risk premium
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