Which situation will most likely lead to an increase in return on equity?
Question 14 1.25 / 1.25 pts Which of the following will reduce the risk of equity (stock) investments? the purchase of shares in firms doing business only in the petroleum industry the purchase of shares in firms doing business only in the construction industry
What are the benefits of a low correlation between stocks?
Nov 04, 2007 · Mitigating equity risk to the fullest extent possible involves holding multitudes of stocks and asset classes and doing so in meaningful allocations across the spectrum of global equity opportunities.
How can I mitigate equity risk in my portfolio?
May 30, 2020 · Liquidity Risk . Liquidity risk is a concern for investors in private equity. Liquidity measures the ease at which investors can get in or out …
How can I reduce portfolio volatility and increase returns?
The equity cost of capital for a stock is the expected return of other investments available in the market with equivalent risk to the firm's shares. B. The price of a share of stock is equal to the present value of the expected future dividends it will pay. C.
How can the risk of stocks be reduced?
Reduce Risk in Stock InvestingDollar-Cost Averaging. ... Index Funds. ... Diversification Across Market Caps. ... Diversification Across Regions. ... Diversification Across Sectors. ... REITs. ... Bond Funds. ... Only Speculate with Money You Can Afford to Lose.More items...
What are the risk associated with stock investment?
Commodity Price Risk.Headline Risk.Rating Risk.Obsolescence Risk.Detection Risk.Legislative Risk.Inflationary Risk and Interest Rate Risk.Model Risk.More items...
Which of the following investments has the lowest risk?
Best Low-Risk InvestmentsTreasury Notes, Treasury Bills and Treasury Bonds. ... Corporate Bonds. ... Money Market Mutual Funds. ... Fixed Annuities. ... Preferred Stocks. ... Common Stocks That Pay Dividends. ... Index Funds.Apr 4, 2022
What are the 4 types of investments?
Different Types of InvestmentsMutual fund Investment. ... Stocks. ... Bonds. ... Exchange Traded Funds (ETFs) ... Fixed deposits. ... Retirement planning. ... Cash and cash equivalents. ... Real estate Investment.More items...
What is equity market risk?
Equity risk is the risk involved in the changing prices of stock investments, and commodity risk covers the changing prices of commodities such as crude oil and corn. Currency risk, or exchange-rate risk, arises from the change in the price of one currency in relation to another.
Why do we need to mitigate the risk in your investments?
Risk mitigation is important in any investment strategy. Without proper risk management, all or most of your money may be lost by investing in the wrong assets at the wrong time.Nov 3, 2021
Which of the following investments has the lowest level of reinvestment risk?
Short-term investments have minimal reinvestment risk; and zero-coupon obligations have no reinvestment risk.
What is equity in investment?
An equity investment is money that is invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange.
Which is true about investments and risk?
Which is true about investments and risk? Every investment carries some degree of risk.
What are the 3 main types of investments?
There are three main types of investments:Stocks.Bonds.Cash equivalent.
What is the most common mistake made by individual investors?
The most common mistake made by individual investors is believing that a few dozen stocks provide meaningful diversification. This belief is generally perpetuated by media and books that report the results of superstar stock pickers and the idea that great investors hold a few stocks, watch them like a hawk, and don't lose money as long as they hold them for the long term. Although these statements are arguably true, they have little to do with mitigating equity risk. Such statements are what might be called "irrational rationalizations," or rational statements used to build an irrational conclusion.
Is it true that mutual funds are opportunistic?
This just isn't true. Keep in mind that mutual fund names are generally chosen for marketing purposes and often have little to do with their asset class exposures. Another thing you need to keep in mind is that a lot of mutual funds tend to be opportunistic and move among various asset classes.
Can mutual funds be used for equity diversification?
So, in order to provide meaningful equity diversification, you need to accept that it can only be accomplished through mutual funds or exchange-traded funds (ETFs). Moreover, you have to accept that you need to pick your mutual funds very carefully — at least as carefully as you would pick an individual stock.
Do index funds leave money on the table?
Individual investors tend to believe that index funds leave a lot of money on the table because good stock pickers can trounce the market if given a chance. Yes, it 's true that there are many instances of great stock pickers beating the markets, but it is also true that there is no proven way whatsoever to find these people ahead of time, meaning there is no such predictive financial model in existence.
Is investing in equities a risk?
However, don't fool yourself. Investing in equities is a risky business, regardless of how well you diversify.
What are the actions of private equity firms?
All of the actions of the firm are to increase the return on investment for the private equity investors involved. Private equity firms are involved in several industries, including: Technology, such as telecommunications, software, and hardware. Healthcare, including drug companies.
Why are private equity investments so risky?
Private equity investors also face greater market risk with their investments compared to traditional investments since there's no guarantee that any of the small companies in which private equity firms invest will grow at all. Failure is much more common among these companies, with only one or two out of a dozen making any significant return for the firm and its investors. An ineffective management team, a new product launch that fails, or a new, promising technology that becomes obsolete due to competitors, can lead to significant losses for private equity investors.
Why is private equity important?
However, private equity carries a different degree of risk than other asset classes due to the nature of the underlying investments.
What is private equity?
Private equity firms pool investor money with other sources of borrowed financing to acquire equity ownership positions in small companies with high growth potential. The investors are typically wealthy individuals and institutional investors, which are companies that invest money on behalf of their clients. Institutional investors can include pensions, mutual funds, and insurance companies.
What are private equity companies?
Private equity firms are involved in several industries, including: 1 Technology, such as telecommunications, software, and hardware 2 Healthcare, including drug companies 3 Biotechnology, which utilizes living organisms to help produce health-related products, biofuels, and food production.
How long does it take to leave a private equity firm?
Earnings growth for small companies can take time, which is why private equity investors are expected to leave their funds with the private equity firm between four and seven years on average.
What is biotechnology?
Biotechnology, which utilizes living organisms to help produce health-related products, biofuels, and food production. Although this may seem like a smart investment strategy, there are a number of different risks associated with investing in small growth businesses, especially those that are still in their startup phases.
What is market value?
Market value reflects the collective and differing expectations of investors. A is correct. A company's market value is affected by management's decisions. Management's decisions can directly affect the company's book value, which can then affect its market value.
Is a company obligated to pay dividends?
The company is not obligated to make dividend payments. It is at the discretion of the company whether or not it chooses to pay dividends. The type of equity voting right that grants one vote for each share of equity owned is referred to as: proxy voting. statutory voting. cumulative voting.
Do emerging market companies have to worry about a lack of liquidity in their home equity markets?
Emerging market companies do not have to worry about a lack of liquidity in their home equity markets. Emerging market companies have found it easier to raise capital in the markets of developed countries. Emerging market companies have benefited from the stability of foreign exchange markets. C is correct.
Is private equity more expensive than public equity?
Private equity firms' regulatory and investor relations operations are less costly than those of public firms. Private equity firms are incentivized to be more open with investors about governance and compensation than public firms.
Is the cost of equity determined?
The cost of equity is not easily determined. It is dependent on investors' required rate of return on equity, which reflects the different risk levels of investors and their expectations about the company's future cash flows. A company's cost of equity is often used as a proxy for investors':
What is the difference between Project A and Project B?
Project A has a standard deviation of expected returns of 20%, while Project B's standard deviation is only 10%. A's returns are negatively correlated with both the firm's other assets and the returns on most stocks in the economy, while B's returns are positively correlated.
Does Bankston issue new stock?
Bankston Corporation forecasts that if all of its existing financial policies are followed, its proposed capital budget would be so large that it would have to issue new common stock. Since new stock has a higher cost than retained earnings, Bankston would like to avoid issuing new stock.
Does Duval have equity?
Duval Inc. uses only equity capital, and it has two equally-sized divisions. Division A's cost of capital is 10.0%, Division B's cost is 14.0%, and the corporate (composite) WACC is 12.0%. All of Division A's projects are equally risky, as are all of Division B's projects.
Is debt riskier than equity?
a. Since debt capital can cause a company to go bankrupt but equity capital cannot, debt is riskier than equity, and thus the after-tax cost of debt is always greater than the cost of equity. b. The tax-adjusted cost of debt is always greater than the interest rate on debt, provided the company does in fact pay taxes.
