Options for first drop-down: return / risk
2. greater or less than / equal to
3. a stand-alone / a self-contained
4. beta coefficient / standard deviation
5. standard deviation / beta cofficient
6. non-diversifiable / diversifiable
7. is / is not
8. non-diversifiable / diversifiable
9. random/ accidental
10. decreasing / increasing
11. 500 / 2,000 +
12. reduces / increases
13. unsystematic or company-specific / systematic or market
14. non-diversifiable / diversifiable
15. will not / will
Professor Isadore (Izzy) Invest-a-Lot retired two years ago from Exceptional College, a small liberal arts college in Mississippi after teaching corporate finance and investment theory for 35 years. Yesterday, Izzy appear on EC LIVE, a television show produced for the students, faculty and staff on the EU campus and the local communities. Greta Greathair is the host of EC LIVE, and one of Professor Izzy's former students The following is a transcript of the interview. Unfortunately the software that transcribes the interview into written form failed to understand several words and phrases used in the interview. To complete the transcript and demonstrate your knowledge of the risks and returns of investing, please select the best answer from each dropdown menu. GRETA: Good morning, Professor Invest-a-Lot. I'd like to welcome you to EC LIVE, and thank you for coming in today to offer us insights into the basics of investing. I remember your course well, and while my grades didn't always reflect great success, was always very interested in the material and the possibility of using the concepts and techniques when the opportunities arose. IZZY: Good morning, Greta, and please call me, Izzy. Thank you for the invitation to discuss one of the important fundamentals to sound investing: an appreciation of the relationship between the objective or outcome of your investment, that is its return, and the likelihood of receiving it, or the investment's return GRETA: Let's begin with the way that risk can-or should be-analyzed. Izzy, what is investment risk, and how should it be evaluated? IZZY: An investment's risk, or the probability that it generates a return that is its expected return, can be considered from two perspectives: that of asset, or a single-asset portfolio, and that of a multiple-asset portfolio. The risk of a single asset is best measured by the of the asset's possible outcomes, while the risk of an asset in a multiple-asset portfolio is best measured by its IZZY: Those are fantastic questions! Systematic risk, also called or market risk, results from phenomena that affect the majority of firms and securities. Since the events or circumstances that give rise to market risk affect most firms, it possible to diversify away this type of risk. Unsystematic, or company-specific, risk, on the other hand, is because it results from events and phenomena that are unique to a particular individual firm. Examples of these events or phenomena include, but are not limited to, earthquakes and tornados, labor unrest and strikes, and lawsuits or marketing campaigns. As these occurrences are an investor's unsystematic risk the number of securities held in the investor's portfolio. can be diversified away by The reduced riskiness of the market portfolio is reinforced by noting that the standard deviation of the average single-stock portfolio is 35%, whereas the standard deviation of the market portfolio, which is assumed to contain approximately stocks, is 20%. Therefore, its riskiness the addition of more and more randomly selected stocks to the portfolio GRETA: That makes sense. So what does this mean for the returns earned on an investment? IZZY: In short, it means that a rational investor can only expect to be compensated for his or her exposure to risk. He or she will not be compensated for the risk that could be eliminated by increasing the size of his or her portfolio GRETA: So, the market will not compensate me for not doing what a rational investor could-and should-do. Is that right? be compensated IZZY: That is absolutely correct. The fact that you, as an investor, do not choose to act rationally Which or tHe rollowing statementS is correct? Check all that apply. Possible sources of diversifiable risk include inflation and commodity price changes, changes in currency exchange rates, and fluctuations in interest rates. Systematic risk reflects the risk that remains after an investor has diversified his or her portfolio. A investor's exposure to company-specific risk can be diversified away by holding approximately 40 randomly-selected securities in an investor's portfolio. 2. The phenomena and behaviors discussed above are based on the assumption that the majority of investors are risk averse. According to the concept of risk aversion, Check all that apply. Investors require a lower return for owning securities that exhibit greater risk Risk-averse investors require a greater return for owning securities that exhibit greater risk 3. The financial performance of an investment is best expressed as a Percentage, as it ignores the timing of the return, such as one year or ten years. Dollar amount, since it reflects the timing of the investment's return Dollar amount, since it clearly identifies the sum of money that can be spent by the owner of the investment Percentage. since it scales, or standardizes, the return earned from the investment by the investment's size. Professor Isadore (Izzy) Invest-a-Lot retired two years ago from Exceptional College, a small liberal arts college in Mississippi after teaching corporate finance and investment theory for 35 years. Yesterday, Izzy appear on EC LIVE, a television show produced for the students, faculty and staff on the EU campus and the local communities. Greta Greathair is the host of EC LIVE, and one of Professor Izzy's former students The following is a transcript of the interview. Unfortunately the software that transcribes the interview into written form failed to understand several words and phrases used in the interview. To complete the transcript and demonstrate your knowledge of the risks and returns of investing, please select the best answer from each dropdown menu. GRETA: Good morning, Professor Invest-a-Lot. I'd like to welcome you to EC LIVE, and thank you for coming in today to offer us insights into the basics of investing. I remember your course well, and while my grades didn't always reflect great success, was always very interested in the material and the possibility of using the concepts and techniques when the opportunities arose. IZZY: Good morning, Greta, and please call me, Izzy. Thank you for the invitation to discuss one of the important fundamentals to sound investing: an appreciation of the relationship between the objective or outcome of your investment, that is its return, and the likelihood of receiving it, or the investment's return GRETA: Let's begin with the way that risk can-or should be-analyzed. Izzy, what is investment risk, and how should it be evaluated? IZZY: An investment's risk, or the probability that it generates a return that is its expected return, can be considered from two perspectives: that of asset, or a single-asset portfolio, and that of a multiple-asset portfolio. The risk of a single asset is best measured by the of the asset's possible outcomes, while the risk of an asset in a multiple-asset portfolio is best measured by its IZZY: Those are fantastic questions! Systematic risk, also called or market risk, results from phenomena that affect the majority of firms and securities. Since the events or circumstances that give rise to market risk affect most firms, it possible to diversify away this type of risk. Unsystematic, or company-specific, risk, on the other hand, is because it results from events and phenomena that are unique to a particular individual firm. Examples of these events or phenomena include, but are not limited to, earthquakes and tornados, labor unrest and strikes, and lawsuits or marketing campaigns. As these occurrences are an investor's unsystematic risk the number of securities held in the investor's portfolio. can be diversified away by The reduced riskiness of the market portfolio is reinforced by noting that the standard deviation of the average single-stock portfolio is 35%, whereas the standard deviation of the market portfolio, which is assumed to contain approximately stocks, is 20%. Therefore, its riskiness the addition of more and more randomly selected stocks to the portfolio GRETA: That makes sense. So what does this mean for the returns earned on an investment? IZZY: In short, it means that a rational investor can only expect to be compensated for his or her exposure to risk. He or she will not be compensated for the risk that could be eliminated by increasing the size of his or her portfolio GRETA: So, the market will not compensate me for not doing what a rational investor could-and should-do. Is that right? be compensated IZZY: That is absolutely correct. The fact that you, as an investor, do not choose to act rationally Which or tHe rollowing statementS is correct? Check all that apply. Possible sources of diversifiable risk include inflation and commodity price changes, changes in currency exchange rates, and fluctuations in interest rates. Systematic risk reflects the risk that remains after an investor has diversified his or her portfolio. A investor's exposure to company-specific risk can be diversified away by holding approximately 40 randomly-selected securities in an investor's portfolio. 2. The phenomena and behaviors discussed above are based on the assumption that the majority of investors are risk averse. According to the concept of risk aversion, Check all that apply. Investors require a lower return for owning securities that exhibit greater risk Risk-averse investors require a greater return for owning securities that exhibit greater risk 3. The financial performance of an investment is best expressed as a Percentage, as it ignores the timing of the return, such as one year or ten years. Dollar amount, since it reflects the timing of the investment's return Dollar amount, since it clearly identifies the sum of money that can be spent by the owner of the investment Percentage. since it scales, or standardizes, the return earned from the investment by the investment's size
