Module 6 Journal

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What is risk? Although many risks (e.g., career risk, risk of how many children to have and whether they will succeed morally and academically, etc.) in the real world are not tradable, some risks (e.g., stock price risk, credit risk, interest rate risk, currency exchange rate risk, risks that insurance policies cover, etc.) are actively traded in the market. What determine the equilibrium price of tradable risks?

7.1 Question 1 Which of the following statements about risk-averse investors is most accurate? A risk averse investor: A seeks out the investment with minimum risk, while return is not a major consideration. B will take additional investment risk if sufficiently compensated for this risk. C avoids participating in global equity markets. 7.2 Question 2 Evidence of risk aversion is best illustrated by a risk-return relationship that is: A negative. B neutral. C positive. 7.3 Question 3 With respect to an investor's utility function expressed as U(F) = E\F] – }¬V« (F), which of the following values for the measure of risk aversion has the least amount of risk aversion? A -4. B 0. C 4.

QUESTION 15 Which of the following statements about Markovitz's portfolio theory is not correct? O A. Portfolio theory ignores unsystematic risk B. Portfolio theory can accommodate investors with different attitudes to risk O. Portfolio theory accommodates the existence of risk free assets OD. Portfolio theory preceded Sharpe's capital asset pricing model O E. Portfolio theory is more appropriate for large institutional investors rather than for private investors

Exposure to systematic or market risk can be reduced by?             A. adding low or negative beta stocks to the portfolio.   B. investing in a variety of economic sectors.   C. cannot be reduced or avoided.   D. diversifying internationally.

Q1)VaR can be defined as the minimal loss of a financial position during a given time period for a given probability. true or fslse  Q2 Stocks tend to move together if they are affected by ________. common economic events events unrelated to the economy idiosyncratic shocks unsystematic risk Q3)Beta can be viewed as a measure of systematic risk TRUE OR FASE

Question 28 The type of the risk that can be eliminated by diversification is called (A) default risk. (B) interest rate risk. c) market risk. D unique risk.

All parts areunder one question and therefore can be answered.  7. Portfolio expected return and risk A collection of financial assets and securities is referred to as a portfolio. Most individuals and institutions invest in a portfolio, making portfolio risk analysis an integral part of the field of finance. Just like stand-alone assets and securities, portfolios are also exposed to risk. Portfolio risk refers to the possibility that an investment portfolio will not generate the investor’s expected rate of return.   Analyzing portfolio risk and return involves the understanding of expected returns from a portfolio. Consider the following case:   Andre is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table:   Stock Percentage of Portfolio Expected Return Standard Deviation Artemis Inc. 20% 6.00% 25.00% Babish & Co. 30% 14.00% 29.00% Cornell Industries 35% 11.00%…

What is a good response to.... A hedge is something an investor can use to mitigate risk while pursuing many different types of investments. There are also differing types of hedges. A cash flow hedge is designed to manage the risk of variability in future cash flows related to forecasted transactions. It stabilizes expected cash flows by using financial instruments to lock in rates or prices (Hoyle, 2024, p. 337). An example out of our textbook involves a company expecting to purchase raw materials in the future entering into a forward contract to lock in the current exchange rate, reducing the risk of fluctuations in currency rates (Hoyle, 2024, p. 340). A fair value hedge aims to offset the risk of changes in the fair value of an existing asset or liability due to market fluctuations. This hedge stabilizes the value of recognized items on the balance sheet (Hoyle, 2024, p. 313). A company holding a fixed-rate bond may use an interest rate swap to hedge against the risk of…

4.32 Investment risk analysis. The risk of a portfolio of financial assets is sometimes called investment risk. In general, in- vestment risk is typically measured by computing the vari- ance or standard deviation of the probability distribution that describes the decision maker's potential outcomes (gains or losses). The greater the variation in potential outcomes, the greater the uncertainty faced by the decision maker; the smaller the variation in potential outcomes, the more predictable the decision maker's gains or losses. The two discrete probability distributions given in the next table were developed from historical data. They describe the potential total physical damage losses next year to the fleets of delivery trucks of two different firms. Loss Next Year SO 500 NW 1,000 1,500 2,000 2.500 Firm A 3.000 3,500 4,000 4,500 5,000 Firm B Probability Loss Next Year 01 SO 0 .01 200 .01 700 1,200 1,700 2,200 2,700 3.200 3.700 4,200 4,700 30 .01 01 Probability 85984579985 .30 a.…

Question Five: Which of the following is not an assumption that underpins the capital asset pricing model (CAPM)? Investors behave in accordance with Markowitz mean-variance portfolio theory. Investors are rational and risk averse. Investors all invest for the same period of time. Investors have heterogeneous expectations about expected returns and return variances for all assets. There is a risk free rate at which all investors can borrow or lend any amount. Capital markets are perfectly competitive, frictionless and efficient. Question Six: Which of the following expressions best describes the slope of the security market line? The slope of the security market line is equal to the Sharpe ratio. The slope of the security market line is equal to the Treynor ratio. The slope of the security market line is equal to alpha. The slope of the security market line is equal to the market risk premium. The slope of the security market line is equal to the standard deviation of the risky…

A Moving to another question will save this response. Question 14 The market compensates investors for accepting which type(s) of risk? O None of the listed selections are correct O market and firm-specific risk O market risk only O firm-specific risk only O diversifiable risk A Moving to another question will save this response. MacBoc esc F1 F2 F3 F4 F5 # $ 2 4 W E T 60

When a firm invests in money market instruments, it is taking _______ and should expect __________.   Question 6 options:   1)  high risk, high returns   2)  high risk, low returns   3)  low risk, low returns   4)  low risk, high returns

Explain these three 1. PURCHASING POWER RISK - is perhaps, more difficult to recognize than the other types of risk. It is easy to observe the decline in the price of a stock or bond, but it is often more difficult to recognize that the purchasing power of the return you have earned on investment has declined (risen) as a result of inflation (deflation). 2. INTEREST RATE RISK - Because money has time value, fluctuations in interest rates will cause the value of an investment to fluctuate also. Although interest rate risk is most commonly associated with bond price movements, rising interest rates cause bond prices to decline and declining interest rates cause bond prices to rise. 3. BUSINESS RISK - refers to the uncertainty about the rate of a return caused by the nature of the business. The most frequently discussed causes of business risk are uncertainty about the firm's sales and operating expenses.