Answered: Adding alternative investments to a…

Business

Accounting

Adding alternative investments to a traditional portfolio can increase expected returns and reduce systematic risk.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Diversification will reduce risk is securities returns are negatively correlated. TRUE FALSE
Investors do not get compensated for holding on to diversifiable risk. True False
2. Stock prices and stand-alone risk Risk is the potential for an investment to generate more than one return. A security that will produce only one known return is referred to as a risk-free asset, as there is no potential for deviation from the known expected outcome. Investments that have the chance of producing more than one possible outcome are called risky assets. Risk, or potential variability in an investment's possible returns, occurs when there is uncertainty about an investment's future outcome, such as the return expected to be generated by the investment and realized by an investor. Generally, investors would prefer to invest in assets that have: O A higher-than-average expected rate of return given the perceived risk O A lower-than-average expected rate of return given the perceived risk Read the following descriptions and identify the type of risk or term being described: Description This type of risk relates to the possibility that a firm will not be able to service its…
A forward rate is the mathematical expectation of a future spot rate in risk neutral world. O True False
The systematic risk principle states that the expected return on a risky asset depends only on which one of the following? Unsystematic risk Market risk Diversifiable risk
Which of the following statements describing the elements of intrinsic valuation is most accurate? a. A simple calculation of present values of expected cashflows of different investments using the risk free rate would be enough to determine which asset is best. b. The risk-free rate is the lowest rate that an investor can earn from short-term investments.c. When the present value of the cashflows is discounted with the appropriate rate end this present value is positive, then the asset providing these cashflows have a value to the investor. d.Cashflows may include depreciatipon expenses and amortization costs.
The recent financial crisis clearly depicted a positive correlation between asset prices and, as a result, could warrant consideration for optimal portfolio strategies. Why would an investor prefer a constrained portfolio optimization approach?
An investment requires a total return that comprises: O a real rate of return and compensation for inflation. a real rate of return, compensation for inflation, and a risk premium. compensation for inflation and a risk premium. a real rate of return, compensation for inflation, a risk premium, and compensation for time and effort devoted to researching alternative investments. None of the above
The risk-adjusted discount rate reduces investment. True or false?
In the standard model of investment management, investors care only for: a. The return and the risk of their portfolio. b. The return, the risk and the degree of ambiguity of their portfolio. c. The return of their portfolio when the market is bullish. d. The relative level of profit they will make in comparison to other investors.
Correct answer needed. Explain also.
Which of the following is TRUE? High-risk investments always have high returns If you invest in a risky investment, you are guaranteed to have a high return. On average, an investor will earn high returns on a low-risk investment On average across investments and over time, riskier investments have higher returns. A high-risk investment will never have a total loss.