【正文】 mogeneous expectations, what portfolio of risky assets do they hold? The market portfolio. What is the formula for beta? Bi = COV(RiRm)/Var(Rm) Why is the beta the appropriate measure of risk for a single security in a large portfolio?Because beta measures the contribution of that single security to the variance of the portfolio. Why is the SML a straight line?Because investors could form homemade portfolios that dominate portfolios that don39。t lie on a straight line. Buying and selling of these portfolios would then drive any outliers back to the line. What is the CapitalAssetPricing model?The CAPM is a linear model that relates the expected return on an asset to its systematic risk (beta). What are the differences between the capital market line and the security market line?The SML relates expected return to beta, while the CML relates expected return to the standard deviation. The SML holds both for all individual securities and for all possible portfolios, whereas the CML holds only for efficient portfolios.CONCEPT QUESTIONS CHAPTER 11 What are the two basic parts of a return?1. The expected part2. The surprise part Under what conditions will some news have no effect on mon stock prices?If there is no surprise in the news, there will not be any effect on prices. That is, the news was fully expected. Describe the difference between systematic risk and unsystematic risk.A systematic risk is any risk that affects a large number of assets, each to a greater or lesser degree. An unsystematic risk is a risk that specifically affects a single asset or a small group of assets. Why is unsystematic risk sometimes referred to as idiosyncratic risk?Because information such as the announcement of a labor strike, may affect only some panies. What is an inflation beta? A GNP beta? An interestrate beta?An inflation beta is a measure of the sensitivity of a stock39。s return to changes in the expected inflation rate. A GNP beta measures the sensitivity of a stock39。s return to changes in the expected GNP. An interest rate beta reflects the sensitivity of a stock39。s return to changes in the market interest rate. What is the difference between a kfactor model and the market model?The main difference is that the market model assumes that only one factor, usually a stock market aggregate, is enough to explain stock returns, while a kfactor model relies on k factors to explain returns. Define the beta coefficient.The beta coefficient is a measure of the sensitivity of stock39。s return to unexpected changes in one factor. How can the return on a portfolio be expressed in terms of a factor model?It is the weighted average of expected returns plus the weighted average of each security39。s beta times a factor F plus the weighted average of the unsystematic risks of the individual securities. What risk is diversified away in a large portfolio? The unsystematic risk. What is the relationship between the onefactor model and CAPM?Assuming the market portfolio is properly scaled, it can be shown that the onefactor model is identical to the CAPM. Empirical models are sometimes called factor models. What is the difference between a factor as we have used it previously in this chapter and an attribute as we use it in this section?A factor is generally a market wide or industry wide factor proxying the systematic risk. An attribute is related with the returns of the stocks. What is data mining and why might it overstate the relation between some stock attribute and returns?Choosing parameters because they have been shown to be related to returns is data mining. The relation found between some attribute and returns can be accidental, thus overstated. What is wrong with measuring the performance of a . growth stock manager against a benchmark posed of English stocks?Using a benchmark posed of English stocks is wrong because the stocks included are not of the same style as those in a . growth stock fund.CONCEPT QUESTIONS CHAPTER 12 What is the disadvantage of using too few observations when estimating beta? Small samples can lead to inaccurate estimations. What is the disadvantage of using too many observations when estimating beta?Firms may change their industries over time making observations from the distant past outofdate. What is the disadvantage of using the industry beta as the estimate of the beta of an individual firm? The operations of a particular firm may not be similar to the industry average. What are the determinants of equity betas?1. The responsiveness of a firm39。s revenues to economy wide movements.2. The degree of a firm39。s operating leverage.3. The degree of a firm39。s financial leverage. What is the difference between an asset beta and an equity beta? Financial leverage. What is liquidity? Liquidity in this context means the cost of buying and selling stocks. Those stocks that are expensive to trade are considered less liquid. h What is the relation between liquidity and expected return?There is a high expected return for illiquid stocks with high trading costs.h What is adverse selection?Adverse selection occurs when individuals have ignorance about traits, trends, or other information hidden in a population. For instance, a trader may suffer from adverse selection if certain market knowledge is hidden from him but is available to some investors.h What can a corporation do to lower its cost of capital?A corporation can be proactive in taking actions that will lower trading costs, thereby lowering its cost of capital.CONCEPT QUESTIONS CHAPTER 13 List the three ways financing decisions can create value.1. Fool investors2. Reduce costs or increase subsidies3. Create a new security Can you define an efficient