Lim Hoi Mun (822531)

Chapter 11 Risk and Return Quick Quiz

1. How do you compute the expected return and standard deviation for an individual asset?
For a portfolio?

Answer:
Expected return is calculated as the weighted average of the likely profits of the assets in the
portfolio, weighted by the likely profits of each asset class. Expected return is calculated by using
the following formula:

This is the formula for Standard Deviation:

This is the formula for Standard Deviation for portfolio:

2. What is the difference between systematic and unsystematic risk?

Answer:
The two major components of risk systematic risk and unsystematic risk, which when combined
results in total risk. The systematic risk is a result of external and uncontrollable variables, which
are not industry or security specific and affects the entire market leading to the fluctuation in
prices of all the securities.
On the other hand, unsystematic risk refers to the risk which emerges out of controlled and
known variables that are industry or security specific. Systematic risk cannot be eliminated by
diversification of portfolio, whereas the diversification proves helpful in avoiding unsystematic
risk.
Lim Hoi Mun (822531)

3. What type of risk is relevant for determining the expected return?

Answer:
Beta. Beta is a measure of the volatility or systematic risk of a security or a portfolio in
comparison to the market as a whole.

4. Consider an asset with a beta of 1.2, a risk-free rate of 5%, and a market return of
13%.What is the expected return on the asset?
Answer:
The formula for calculating the expected return of an asset given its risk is as follows:

E(R) = 0.05+ 1.2 (0.13 - 0.05) = 0.146 or 14.6%