Financial Investment and Portfolio Management
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Questions and Answers

What is the total risk for a security measured by?

  • Its standard deviation of returns (correct)
  • Its beta with the market portfolio
  • Its systematic risk
  • Its unsystematic risk

    • What type of risk affects all securities in the market?

  • Unsystematic risk
  • Systematic risk (correct)
  • Firm-specific risk
  • Industry risk

    • What is the nominal risk-free rate or interest a function of?

  • The real risk-free rate and the investments variance
  • The real risk-free rate and the rate of inflation (correct)
  • The tax-free rate plus the rate of inflation
  • The T-note rate plus the inflation rate

    • What is the basic trade-off in the investment process?

    <p>The trade-off between the anticipated rate of return for a given investment instrument and its degree of risk</p> Signup and view all the answers

    What does the beta of a security or portfolio measure?

    <p>The systematic risk index of that asset</p> Signup and view all the answers

    What is the slope of the capital market line?

    <p>The ratio of the risk premium to the standard deviation of the portfolio</p> Signup and view all the answers

    What type of risk is caused by internal factors and affects only one investment?

    <p>Unsystematic risk</p> Signup and view all the answers

    What is the risk that is common to all securities and cannot be diversified away?

    <p>Systematic risk</p> Signup and view all the answers

    What is a market portfolio?

    <p>A portfolio that has the same capital investment ratio in all securities as the market</p> Signup and view all the answers

    What is financial investment?

    <p>A form of capital investment in cash or financial assets with the expectation of profit in the future</p> Signup and view all the answers

    What does it mean if a security has a β greater than the β of the market portfolio?

    <p>That security is riskier and its expected return will be greater than the return of the market portfolio</p> Signup and view all the answers

    What does each point on the CML line represent?

    <p>Risk-return tradeoff for a particular portfolio</p> Signup and view all the answers

    What is an aggressive investment strategy?

    <p>A strategy that attempts to improve investment performance by uncovering undervalued securities and/or reallocating investment assets</p> Signup and view all the answers

    What is the relationship between risk and investment return?

    <p>The higher the investment return, the higher the risk</p> Signup and view all the answers

    What is the main source of risk in investment and trading securities?

    <p>The uncertainty of future income</p> Signup and view all the answers

    What is the primary goal of an investment strategy?

    <p>To achieve a balance between risk and return</p> Signup and view all the answers

    Study Notes

    Market Portfolio and Financial Investment

    • A market portfolio consists of securities available in the market, whose total capital is equal to the market.
    • Financial investment is a form of capital investment in cash or financial assets with the expectation of profit in the future.

    Security Beta and Market Portfolio

    • If a security has a beta greater than the beta of the market portfolio, it is riskier and its expected return will be greater than the return of the market portfolio.
    • A security with a lower beta has lower risk and its expected return will be lower than the return of the market portfolio.

    CML Line and Risk

    • Each point on the CML line represents the risk-return trade-off of a portfolio.
    • The CML line shows the market equilibrium at different levels of risk.

    Aggressive Investment Strategy

    • An aggressive investment strategy attempts to improve investment performance by uncovering undervalued securities and/or reallocating investment assets.

    Risk in Investment

    • Risk in investment arises due to the uncertainty of future income.
    • The higher the potential return, the higher the risk.
    • The actual returns may decline relative to estimated returns.

    Measuring Risk

    • The total risk for a security can be measured by its standard deviation of returns.
    • Beta measures the systematic risk of a security with the market portfolio.

    Systematic Risk

    • Systematic risk affects all securities in the market and is uncontrollable.
    • The degree of influence of systematic risk is measured by beta.

    Nominal Risk-Free Rate

    • The nominal risk-free rate is a function of the real risk-free rate and the rate of inflation.

    Investment Process

    • The basic trade-off in the investment process is between the anticipated rate of return for a given investment instrument and its degree of risk.

    Beta of Security

    • The beta of a security is a measure of its systematic risk index.
    • Beta is determined by statistical methods.

    Capital Market Line

    • The slope of the capital market line (Sharp ratio) is the ratio of the risk premium to the standard deviation of the portfolio.
    • It measures the excess return per unit of risk.

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    Description

    This quiz covers the basics of financial investment and market portfolio, including security beta and risk assessment. Learn how to manage your investments and make informed decisions.

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