Full Answer
What kind of risk will you be exposed to when investing?
You invest $100,000 in only one stock. To which kind of risk will you primarily be exposed? Stand-alone risk Generally, investors would prefer to invest in assets that have: A higher-than-average expected rate of return given its perceived risk. A financial planner is examining the portfolios held by several of her clients.
Which option will Erik choose as an investor?
Therefore, as a risk-averse investor, Erik will prefer option 1, which has no risk at all and provides a guaranteed $1,100 payoff in one year. Suppose the market risk premium is currently 6%. If investors were to become more risk-averse, the market risk premium might increase to 8%.
How does the risk in a portfolio increase?
The risk in a portfolio will increase if more stocks that are negatively correlated with other stocks are added to the portfolio. False A portfolio's risk is not equal to the weighted average of the individual stocks' standard deviations. True A stock is in equilibrium if its required return ________ its expected return.
How do the three investment alternatives exhibit different levels of risk?
Explanation: Although the three investment alternatives have the same expected return, they exhibit different levels of risk (as measured by their standard deviation). Remember, a risk-averse investor requires additional expected return for assuming additional risk.
What is the remaining risk of a stock?
The remaining risk is the market risk, which cannot be diversified. Each stock's contribution to market risk is termed systematic risk. The beta coefficient is a statistical measure of the stock's relation with the market—that is, the extent to which a stock rises and falls with the changes in the market.
What happens when market risk premium goes up?
If the market risk premium goes up, so does the required return. If you are discounting cash flows with a higher required return, the present values will be smaller. That means the value of financial assets will decline. A financial planner is examining the portfolios held by several of her clients.
What does it mean when a stock has a beta of 1.0?
If a stock has a beta of more than 1.0, it means that the stock's positive and negative returns are of greater magnitude than average market returns. Investors should expect a higher rate of return from stocks with higher betas. Deborah holds a $5,000 portfolio that consists of four stocks.