# FIN 301 BP orter larac 3 26 Sheet

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```					FIN 301 – Porter        3/26/09

Terms:
Coefficient of Variation
Risk Aversion
Risk Premium
1. The idea that investors dislike risk and require a higher rate of return in order to hold that
security is referred to as _____________________.
2. The standardized measure that shows the risk per unit of return is ___________________.
3. The price difference between a risky asset and a riskless asset that is the compensation to the
investor for holding a security with risk is called ______________________.
Equations:
4. CV =
5. Portfolio Expected Return =

Concepts:
6. Which of the following statements is correct?
a. Investors except risk and view it as a challenge
b. The further to the left a probability distribution is, the probability of having a negative
outcome increases
c. If all stocks have the same amount of risk, there is no advantage to diversification
d. Stand-alone risk = Diversifiable Risk + Total Risk
7. When regarding coefficient of variation, the most attractive investment has the _______ CV.
a. Smallest
b. Average
c. Largest
8. _______________ risk can not be eliminated through diversification of a portfolio.
a. Stand Alone
b. Diversifiable
c. Total
d. Market
9. Which of the following is incorrect?
a. As CV increases, the probability of a negative outcome increases
b. As a graph moves further to the right, the probability of a positive outcome increases
c. The narrower the distribution is, there is an increased probability of a negative outcome
d. A smaller CV is preferred to a larger CV
10. When diversifying a portfolio, the greatest amount of diversification occurs when you buy stocks
a. 1-5
b. 6-10
c. 10-20
d. 20-40
FIN 301 – Porter       3/26/09

11. A correlation between two stocks must be lower then ____ to benefit from diversification.
a. 1
b. .99
c. 0
d. -.99
e. -1
12. Wal-Part stock tends to go when the economy is in a recession, where as Goocci stock tends to
provide positive returns when the economy is doing well. Based upon this information, these
two stocks would have a correlation close to_____ because they are ____________ correlated.
a. 1, positively
b. -1, positively
c. 1, negatively
d. -1, negatively
13. As one adds stocks to a portfolio
a. Standard deviation will continue to shrink, but will never become a straight line
b. There is little advantage of holding 10 stocks because the advantages of diversification
are not felt until invested in at least 25 stocks
c. They are paying a premium for holding these stocks
Problems:
1. You are trying to compile and are interested in 3 stocks listed below and plan to put equal money
into each stock. What is the expected return, standard deviation, and coefficient of variation of
each? What is the expected return, standard deviation, and coefficient of variation on the
portfolio?

Economy             Probability          T-Bill                Hall Construction    Wells Oil

Recession           .30                  4.75%                 -18%                 4%

Average             .40                  4.75%                 6%                   6%

Boom                .30                  4.75%                 23%                  8%

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