1. Clearly explain why some risks are systematic and others non-systematic. How is it possible for an investor to control the level of non-systematic risk in a portfolio but not the level of systematic risk? 2. John is considering an investment in these two stocks, Stock A and Stock B, and has come to you for advice whether to buy and/or avoid any of the stocks. Stock A has a beta of 1.15 and an expected return of 14%. Stock B has a beta of 0.7 and an expected return of 9%. If the risk free rate is 5% and the market return is 12%, what will be your best recommendation to John? 3. What advice would you give to a client who is confused about the concept that in a well-functioning market all assets will have the same reward to risk ratio? Your answer should cover the following issues: i.How would we expect that all assets have the same reward to risk ratio? ii. How can an investor increase his/her returns if this holds true.
1. Clearly explain why some risks are systematic and others non-systematic. How is it possible for an investor to control the level of non-systematic risk in a portfolio but not the level of systematic risk?
2. John is considering an investment in these two stocks, Stock A and Stock B, and has come to you for advice whether to buy and/or avoid any of the stocks. Stock A has a beta of 1.15 and an expected return of 14%. Stock B has a beta of 0.7 and an expected return of 9%. If the risk free rate is 5% and the market return is 12%, what will be your best recommendation to John?
3. What advice would you give to a client who is confused about the concept that in a well-functioning market all assets will have the same reward to risk ratio? Your answer should cover the following issues:
i.How would we expect that all assets have the same reward to risk ratio?
ii. How can an investor increase his/her returns if this holds true.
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