Page 90 - DCOM504_SECURITY_ANALYSIS_AND_PORTFOLIO_MANAGEMENT

Unit 2: Risk and Return

2.9 Self Assessment Notes

State whether the following statements are true or false:
1. If the utility function is linear, the decision-maker maximises expected utility by
maximising expected monetary value.
2. The portfolio's expected return is a arithmetic mean of the expected returns of its securities.
3. Diversification can reduce risk.

4. Risk is the possibility that an investment's actual return will be different than expected.
5. Higher risk equals greater return.
Fill in the blanks:
6. .................. is the risk associated with the particular secondary market in which a security
trades.
7. The rate of return expected by the investor consists of the .................. and ..................
8. Beta is useful for comparing the relative .................. of different stocks.
9. .................. are considered to be the most risky investment.

10. The .................. for some future period is known as the expected return.
11. International risk can include both .................. and ..................
12. Beta is a measure of the systematic risk of a security that cannot be avoided through
..................
13. Risk .................. and risk .................. are two main objectives of portfolio management.
14. Every investment involves uncertainties that make future investment returns ..................

15. Beta measures a security's .................., or fluctuations in price, relative to a .................., the
market portfolio of all ..................

2.10 Review Questions

1. Mr. RKV invested in equity shares of Wipro Ltd., its anticipated returns and associated
probabilities are given below:
Return (%) -15 -10 5 10 15 20 30
Probability 0.05 0.10 0.15 0.25 0.30 0.10 0.05

You are required to calculate the expected rate of return and risk in terms of standard
deviation.
2. The probabilities and associated returns of Modern Foods Ltd., are given below:

Return (%) 12 15 18 20 24 26 30
Probability 0.05 0.10 0.24 0.26 0.18 0.12 0.05

Calculate the standard deviation.

LOVELY PROFESSIONAL UNIVERSITY 85