Reference no: EM133238788

Gapenski's Healthcare Finance - An Introduction to Accounting and Financial Management, Seventh Edition, Reiter and Song, HAP Publishing, Chicago IL.

Questions

1. When considering stand-alone risk, the return distribution of a less risky investment is more peaked (" tighter") than that of a riskier investment. What shape would the return distribution have for an investment with (a) completely certain returns and (b) completely uncertain returns?

2. Stock A has an expected rate of return of 8 percent, a standard deviation of 20 percent, and a market beta of 0.5. Stock B has an expected rate of return of 12 percent, a standard deviation of 15 percent, and a market beta of 1.5. Which investment is riskier? Why? (Hint: Remember that the risk of an investment depends on its context.)

3. a. What is risk aversion?

b. Why is risk aversion so important to financial decision-making?

4. Explain why holding investments in portfolios has such a profound impact on the concept of financial risk.

5. Assume that two investments are combined in a portfolio.

a. In words, what is the expected rate of return on the portfolio?

b. What condition must be present for the portfolio to have lower risk than the weighted average of the two investments?

c. Is it possible for the portfolio to have lower risk than that of either investment?

d. Is it possible for the portfolio to be riskless? If so, what condition is necessary to create such a portfolio?

6. Explain the difference between market risk and diversifiable risk.

7. What are the implications of portfolio theory for investors?

8. a. What are the two types of portfolio risk?

b. How is each type defined?

c. How is each type measured?

9. Under what circumstances is stand-alone and market risk most relevant?

10. a. What is the capital asset pricing model (CAPM)? The security market line (SML)?

b. What are the weaknesses of the CAPM?

c. What is the value of the CAPM?"