Financial Management - Study Mode
[#796] An average return of portfolio divided by its standard deviation is classified as
Correct Answer
(C) Sharpe's reward to variability ratio
Explanation
Solution: An average return of portfolio divided by its standard deviation is classified as Sharpe's reward to variability ratio. The sharpe ratio definition is the excess return or risk premium of a well diversified portfolio or investment per unit of risk. Measure sharpe ratio using standard deviation. You may also know this ratio as the reward to variability ratio or the reward to volatility ratio.
[#797] According to capital asset pricing model assumptions, variances, expected returns and covariance of all assets are
Correct Answer
(A) identical
Explanation
Solution: According to capital asset pricing model assumptions, variances, expected returns and covariance of all assets are identical. The Capital Asset Pricing Model ( CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks.
[#798] Sum of market risk and diversifiable risk are classified as total risk which is equivalent to
Correct Answer
(D) variance
Explanation
Solution: Sum of market risk and diversifiable risk are classified as total risk which is equivalent to variance.
[#799] Betas tend to move towards 1.0 with passage of time are classified as
Correct Answer
(D) adjusted betas
Explanation
Solution: Betas tend to move towards 1.0 with passage of time are classified as adjusted betas. The Adjusted Beta is an estimate of a security's future Beta. Adjusted Beta is initially derived from historical data, but modified by the assumption that a security's true Beta will move towards the market average, of 1, over time.
[#800] Stock issued by company have higher rate of return because of
Correct Answer
(B) high book to market ratio
Explanation
Solution: Stock issued by company have higher rate of return because of high book to market ratio. A high ratio is preferred by value managers who interpret it to mean that the company is a value stock, that is, it is trading cheaply in the market compared to its book value.