3. Stock prices and stand-alone risk

Risk is the potential for an investment to generate more than one return. A security that will produce only one known return is referred to as a risk-free asset, as there is no potential for deviation from the known expected outcome. Investments that have the chance of producing more than one possible outcome are called risky assets. Risk, or potential variability in an investments possible returns, occurs when there is uncertainty about an investments future outcome, such as the return expected to be generated by the investment and realized by an investor.

As an investor and based on your understanding of risk, which of the following statements is true?

A.) S&P 500 companies that are considered to be riskier than the others will have a lower expected rate of return than the others.

B.) S&P 500 companies that are considered to be riskier than the others will have a higher expected rate of return than the others.

Read the following descriptions and identify the type of risk or term being described:

Terms

This type of risk relates to fluctuations in exchange rates. (Systematic Risk, Unsystematic Risk)

This type of risk is associated with how a firm is financed. (Systematic Risk, Unsystematic Risk)

A measure of the variability of a set of outcomes. (Coefficient of variation, Standard Deviation)

This can be used to reduce the stand-alone risk of an investment by combining it with other investments in a portfolio. (Diversification, Risk Premium)

You invest $100,000 in 40 stocks, 20 bonds, and a certificate of deposit (CD). What kind of risk will you primarily be exposed to?

A) Portfolio risk

B) Stand-alone risk

Generally, investors would prefer to invest in assets that have:

A) a low level of risk and high expected returns.

B) a high level of risk and low expected returns.