Chapter 10

Two of the most important financial analysis concepts are __ & ___

''financial risk'' is present whenever there is some chance of earning a return on an investment that is ____ than the amount expected.

the greater the probability of a return ''far below'' that anticipated, the ___ the risk

choose 3. in their attitude towards investment risk, investors can be

Most investors are ''risk averse'' which means that ___ risk investments require ___ rates of return it is risk aversion that makes risk concepts so important to financial decision making

the chance that an event will occur is called its ___ of ___, or just probability

a ''probability _____'' lists all possible event outcomes along with their probabilities

example, a probability distribution a coin toss:

very poor .10 [-10% -20%] poor .20 [0 0] average .40 [10 15] good .20 [20 30] very good .10 [30 50]

''expected rate of return'' is estimated ___ an investment is made

after the fact, the return that is actually achieved is called ____ rate of return

when risk is present, the realized rate of return _____ equals the expected rate of return rarely

''stand alone risk'' is defined and measured assuming an investment will be held in ____

stand alone risk can be measured by the degree of ____

common measure of ''stand alone risk'' is the ____ ___, usually represented by a lower case sigma ___

what is CV?

the coefficient of variables (cv) is defined as the standard deviation divided by the expected rate of return for example: CV mri == 11%/10% = 1.1 it is a _____ measure _____ risk

which is riskier? CV mri = 11%/10% = 1.1 CV clinic = 18%/15%= 1.2 indicates that the clinic investment is riskier than the MRI investment CV is most useful when comparing investments with widely different returns

standard deviation (cv) is an applicable risk measure _____ when an investment is held in ______

most investments are held as part of a collection, or _____, of investments

when investments are held in ''portfolios'', the relevant return, and hence risk, is that of the _____ portfolio

A, B, C, D (Referring to slide 10-14) are single assets AB, AC, AD are equal weighted aka 50/50 portfolios of those single assets

''expected rate of return on a portfolio'' is merely the ___ average

a ''portfolio's return'' is simply the ''weighted average'' of the returns of the components however, a ''portfolio's risk'' which is typically measured by standard deviation is ''_____'' the ____weighted______ average of the component of standard deviations it depends on the ___ among the returns of the portfolio's components

the movement relationship between _____ variable (s) is called _____

correlatoin is measured by the ''correlation efficient'', _

r = +1 : perfect positive correlation r = -1: perfect negative correlation r= 0 : zero correlation

it is ''difficult'' to generalize about correlations among investment returns. however, it is ___ (if not ___ ) to find r = +1 , r = -1, or even r = 0 the correlation between 2 randomly chosen investments is likely to range from +0.4 to + 0.8 ''why?''