Why do investors require a market risk premium to invest in?
Why do investors require a market risk premium to invest in common stock? (select all that apply) Because stock returns fluctuate widely over time and may be negative, while Treasury bill returns are relatively stable and risk free; to compensation them for the extra risk of investing in common stock over risk-free Treasury bills.
What are the returns on stocks?
Returns on stock consist of dividends and capital gains; risk and return are almost always higher than for treasury bills and bonds; the investor can lose all or part of the principal invested. Rank the following investments from lowest risk to highest risk.
Do investors demand the same return each year on their investments?
Investor are not likely to demand the same return each year on their stock investment; the market return can be expressed as the sum of the Treasury bill return plus a market risk premium. Treasury bill return varies over time. Diversification of a stock portfolio can be achieved by...
Why do investors prefer common stock over treasury bills?
Because stock returns fluctuate widely over time and may be negative, while Treasury bill returns are relatively stable and risk free; to compensation them for the extra risk of investing in common stock over risk-free Treasury bills. Which of the following factors can affect an investor's return on a diversified portfolio?
Should investors demand higher expected rates of return from stocks with returns that are highly exposed to market risks?
A stock with returns that are highly exposed to macroeconomic changes will carry higher market risk because macroeconomic change is an indication of market risk. So, investors will demand higher expected returns from stocks with returns that are highly exposed to macroeconomic changes.
What is the difference between the expected return and the required return when should the two returns be equal?
If the required return is less than the expected return, the stock is considered undervalued and is purchased. Conversely, if the required return exceeds the expected return, the stock is overvalued and is sold short. -When the two returns are equal, the stock is correctly valued.
What is the concept of the riskier the investment the higher the rate of return it usually takes to attract investors?
You might be familiar with the concept of risk-reward, which states that the higher the risk of a particular investment, the higher the possible return. But many individual investors do not understand how to determine the appropriate risk level their portfolios should bear.
What is the relationship between risk and return investing quizlet?
The higher an investment's risk, the HIGHER the return required to induce investors to purchase the asset. This relationship between risk and return indicates that investors are risk AVERSE; investors dislike risk and require HIGHER rates of return as an inducement to buy riskier securities.
Should an investment have a higher expected rate of return than required rate of return?
The greater the return, the greater the level of risk. A lesser return generally means that there is less risk. RRR is commonly used in corporate finance when valuing investments. You may use RRR to calculate your potential return on investment (ROI).
Should expected rate of return be higher than required rate of return?
If the expected return of an investment does not meet or exceed the required rate of return, the investor will not invest. The required rate of return is also called the hurdle rate of return.
Why is higher return higher risk?
What is a high-risk, high-return investment? High-risk investments may offer the chance of higher returns than other investments might produce, but they put your money at higher risk. This means that if things go well, high-risk investments can produce high returns.
What is the relationship between the expected rate of return and the investment risk?
Generally, the higher the potential return of an investment, the higher the risk. There is no guarantee that you will actually get a higher return by accepting more risk.
What factors do investors need to think about before investing?
9 Factors to Consider When Making Investment DecisionsReturn on Investment (ROI)Risk.Investment Period / Investment Term.Liquidity.Taxation / Tax Implications.Inflation Rate.Volatility / Fluctuations on Investment Markets.Investment Planning Factors.More items...•
Which investment would you expect to have higher returns?
The stock market has long been considered the source of the highest historical returns. Higher returns come with higher risk. Stock prices are more volatile than bond prices. Stocks are less reliable in shorter time periods.
What type of relationship exists between risk and expected return quizlet?
There is a positive relationship between risk and return. Total risk is measured by the standard deviation.
What might convince an investor to buy stock?
What might convince an investor to buy stock or mutual funds? increase both risks and returns. reduce both risks and returns. increase liquidity of investments.
Common and Preferred Stock
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Preferred Stock Versus Common Stock
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Shareholder's Equity
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What is the return on a stock?
Returns on stock consist of dividends and capital gains; risk and return are almost always higher than for treasury bills and bonds; the investor can lose all or part of the principal invested.
Why are Treasury bills more stable than common stock?
Because stock returns fluctuate widely over time and may be negative, while Treasury bill returns are relatively stable and risk free; to compensation them for the extra risk of investing in common stock over risk-free Treasury bills.
How to express market return?
Investor are not likely to demand the same return each year on their stock investment; the market return can be expressed as the sum of the Treasury bill return plus a market risk premium. Treasury bill return varies over time.
Is inflation risk free?
Other than some uncertainty about inflation, they are risk-free.
Can investors demand the same risk premium today?
We cannot be sure that investor demand the same risk premium today as in the past; some financial managers and economists believe that the historical risk premium is too large; it is very difficult to measure the market risk premium exactly.