Investment Risk Assessment Quiz

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Questions and Answers

What does HPY stand for in the context of investment?

Home Price Yield

Holding Period Yield (correct)

Historical Price Yield

High Price Yield

How is the HPY calculated based on the given information?

HPY = (Final Value - Initial Value) / Initial Value (correct)

HPY = (Initial Value - Final Value) / Initial Value

HPY = Selling Price - Purchase Price

HPY = Selling Price / Purchase Price

What is the HPY percentage calculated in the example?

50%

75% (correct)

125%

100%

If the initial price was PHP 20, what was the gain per share after three years?

PHP 15 Signup and view all the answers

What is the formula to obtain the Annual HPY from the HPY?

Annual HPY = HPY / Total Years Signup and view all the answers

In the context of this investment scenario, what is the duration of the holding period?

3 years Signup and view all the answers

If the HPY is 75% over three years, what is the total return on an investment of PHP 100?

PHP 175 Signup and view all the answers

What does the range in risk assessment measure?

The difference between optimistic and pessimistic scenarios Signup and view all the answers

Which of the following is a measure of risk?

Coefficient of Variation (CV) Signup and view all the answers

In the standard deviation formula, what does the variable 'k' represent?

A specific outcome in the dataset Signup and view all the answers

What is the purpose of sensitivity analysis in risk assessment?

To assess the impact of changes in input variables Signup and view all the answers

Which formula calculates the standard deviation of a portfolio?

$rac{1}{n-1} imes ext{Sum of squared differences}$ Signup and view all the answers

What does a higher Coefficient of Variation (CV) indicate?

Higher variability in returns relative to the mean Signup and view all the answers

What is the first step in risk assessment as described?

Conducting sensitivity analysis Signup and view all the answers

What is the relationship between standard deviation and risk?

Higher standard deviation reflects greater risk Signup and view all the answers

What adjustment is made to the Standard Deviation formula according to the provided content?

Use of 'n-1' Signup and view all the answers

In which economic state does Asset 'C' yield its maximum return?

Upturn Signup and view all the answers

What is the range for Asset 'C' calculated from the economic states?

8% Signup and view all the answers

Which asset is considered riskier based on the provided data?

Asset 'C' Signup and view all the answers

What is the expected return for Asset 'D' in a Stable economic state?

5% Signup and view all the answers

What is the purpose of the given formulas and examples?

To compare different asset risks and returns Signup and view all the answers

What is the return for Asset 'C' in the Decline economic state?

2% Signup and view all the answers

What does the abbreviation SD stand for in the context of finance?

Standard Deviation Signup and view all the answers

What does k represent in the context of the assets?

Expected return rate Signup and view all the answers

What does the Capital Asset Pricing Model (CAPM) incorporate that the Markowitz Portfolio Theory (MPT) does not?

Risk-free asset Signup and view all the answers

Which year was the Capital Asset Pricing Model (CAPM) developed?

1965 Signup and view all the answers

Arbitrage Pricing Theory (APT) is best described as a theory that:

Provides a multi-factor approach to asset pricing Signup and view all the answers

Who are the developers associated with the Capital Asset Pricing Model?

Sharpe, Lintner, and Mossin Signup and view all the answers

Which of the following theories primarily focuses on the implications of risk and return?

All of the above Signup and view all the answers

What is the primary objective of the Markowitz Portfolio Theory (MPT)?

Minimize risk while achieving desired returns Signup and view all the answers

In which publication can the discussed theories around portfolio management be found?

Fundamentals of Investment Management Signup and view all the answers

Which of the following statements is accurate regarding the relationship between CAPM and MPT?

CAPM adds complexity to MPT by factoring in the risk-free asset. Signup and view all the answers

Which of the following assumptions of CAPM states that investors can acquire any amount of funds?

Limitless funds may be obtained by investors Signup and view all the answers

What does the assumption that 'all assets are perfectly divisible' imply?

Investors can buy fractional shares of any asset or portfolio Signup and view all the answers

What is indicated by investors using identical time horizons in their investment assessments?

Investors evaluate long-term risks in a similar timeframe Signup and view all the answers

Which assumption suggests that all investors will project the same 'probability distributions for rates of return'?

Investors have access to complete information Signup and view all the answers

What does it mean when it is stated that investments are free from taxes and transaction costs?

Investors do not need to consider the cost of trading or taxes when making decisions Signup and view all the answers

Which of the following best describes market efficiency in the context of CAPM?

Asset prices reflect all available information at any given time Signup and view all the answers

How do investors assess investment opportunities according to CAPM assumptions?

Using the expected value & standard deviations of portfolio returns Signup and view all the answers

What does the assumption about 'identical time horizons' imply for investors?

Overall market behavior can be predicted based on average investor actions Signup and view all the answers

What does a change in inflation indicate in the context of finance?

It leads to a new required return. Signup and view all the answers

Which factor is affected by risk aversion according to CAPM principles?

The required return on assets. Signup and view all the answers

In CAPM, what happens when risk aversion increases?

The required return increases. Signup and view all the answers

What is one key assumption of the Capital Asset Pricing Model (CAPM)?

All investors have the same expectations. Signup and view all the answers

How does CAPM relate to the required return on an asset?

It connects the required return to the asset's risk level. Signup and view all the answers

What can be concluded about investor behavior in response to rising inflation?

Investors may seek riskier assets to maintain returns. Signup and view all the answers

What is the impact of an increase in required return on investment decisions?

It discourages potential investment opportunities. Signup and view all the answers

According to CAPM, what directly influences an investor's required return?

Expected inflation rates. Signup and view all the answers

Study Notes

Return

Return is the total gain or loss on an investment over a given period.
Formula for Holding Period Return (HPR): (Ending Value + Cash Flows) / Beginning Value
Formula for Holding Period Yield (HPY): HPR - 1
Annual HPY = (Annual HPR)^ (1/n) - 1, where n is the investment period in years

Risk

Risk refers to the uncertainty that an investment will earn its expected rate of return.

Risk Assessment: Range

Formula: Range = |Optimistic Case – Pessimistic Case|

Risk Measurement: Standard Deviation (SD)

Formula: σ = √Σ [(kj - k̄)² * Pr(kj)] or σ = √Σ [( kj – k̄)² / (n – 1)]
Note: Values may be adjusted to determine portfolio SD

Risk Measurement: Coefficient of Variation (CV)

Formula: CV = σ / k̄
Note: Formulae may be adapted to determine the portfolio SD. k̄ and kp are used in calculation.*

Integrated Example: An Asset's Risk

Examples given to determine range, SD, & CV of assets (C and D). Data for each asset was provided.
Asset C's riskier than Asset D based on the computed risk measures.

Integrated Example: A Portfolio's Risk

Examples given to calculate portfolio's standard deviation (SD)
Diversification reduces risk.

Correlation Coefficient

Formula: r = COV(kᵢ, kⱼ) / (σᵢ * σⱼ)
Note:* cov= Σ(kᵢ-k̄ᵢ)(kⱼ-k̄ⱼ)Pᵢⱼ
Examples given to illustrate how the correlation coefficient is calculated. Data for each asset was provided.

CAPM

Developed by Sharpe, Lintner, and Mossin.
Accounts for risk-free asset (RF).
Ties systematic risk and return of assets. Uses past data. Assumes efficient markets.
Attributes of an efficient market:
numerous investors
identical information, & assumptions about securities.
No limitations (taxes, transaction costs)
Sensible investors
Kinds of Risk:
Nondiversifiable (systematic risk): Beta Coefficient
Diversifiable (unsystematic risk)

CAPM Formula

Formula: kᵢ = RF + [βᵢ * (kₘ - RF)]
where: RF = risk-free rate
kᵢ = required return
βᵢ = beta coefficient
kₘ = market return

CAPM Example

Examples are given in the slides to show how to calculate required return

CAPM Critiques

Unclear proxy for risk-free rate (RF)
Unclear market return (km)
Changes in beta of assets over time.

Addressing CAPM Critiques

Use portfolio beta (βp) instead of individual security beta (βi)
Formula: kₚ= RF + [βₚ * (Km - RF)]

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Description

Test your knowledge on investment returns, risk measurement, and assessment techniques. This quiz will cover concepts such as Holding Period Return, Standard Deviation, and Coefficient of Variation with practical examples. Get ready to enhance your understanding of financial risk management!