If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve returns, and they are exposed to relatively risk. --- lower; lower lower; higher O higher; lower O higher; higher

If investors speculate in derivative contracts rather than in the underlying asset, they will probably achieve returns, and they are exposed to relatively risk. --- lower; lower lower; higher O higher; lower O higher; higher

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter11: Risk-adjusted Expected Rates Of Return And The Dividends Valuation Approach

Section: Chapter Questions

Problem 3QE

See similar textbooks

Related questions

Q: Investors require a _____ return as compensation for taking ____ risk. A) higher, margin B)…

A: Risk is the possibility that the actual return on any investment made might be different from the…

Q: Economy Probability Stock A Stock B Recession -30% -20% 10% 5% 40% 15% Average Boom 0.25 0.50 0.25…

A: Formula for standard deviation in every state of economy is SD =(A-A bar)2*P where A=Return of stock…

Q: If you have long position in one asset and you want to hedge the risk of price drop in that asset…

A: With the help of a hedging strategy, the investor generally reduces or set off the risk while…

Q: Using a payback period rule tends to bias investors toward Select one: a. riskier investments. b.…

A: Payback period: This method is used to calculate how many years a project will take to recover its…

Q: An estimation by marginal investor, a higher expected return is earned on A. more risky securities…

A: An estimation by marginal investor , a higher expected return is earned on more risky securities.

Q: Equity price risk is the risk that arises from security price Choose. - the risk of a Choose... v in…

A: The question is fill in the blanks and is related with Portfolio Management.

Q: 1. The diversifiable risk of a portfolio: a. Is correlated with systematic risk. b. Can be made…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Short-term investments have higher maturity risks as compared to long-term investments. A. TRUE B.…

A: Short term instruments typically mature within one year and have less maturity risk compared to long…

Q: Evaluate the following statement: If the financial market is frictionless and complete, the asset…

A: A monetary market is where individuals might trade minimal expense monetary protections and…

Q: 6. Which of the following is NOT an assumption used in deriving the Capital Asset Pricing Model…

A: Capital Asset Pricing Model :- This model was developed by Sharpe Mossin and Lintner in 1960 . In…

Q: According to Capital Asset Pricing theory (CAPM), in a competitive marketplace: Group of answer…

A: Capital Asset Pricing Model(CAPM) is an investment tool used to determine the fair valuation of…

Q: Under prospect theory, the shape of the utility function implies that investors are

A: Under prospect theory, the shape of the utility function implies that investors are: (A) Always risk…

Q: Call options' value go up if the market perceives the underlying asset to be undervalued. S2: Put…

A: The two statements are given as: STATEMENT 1: Call options' value go up if the market perceives the…

Q: In the capital asset pricing model, the general risk preferences of investors in the marketplace are…

A: Capital asset pricing model is used to calculate the expected returns on the investment made by the…

Q: nvestors choose deri tives

A: derivatives are financial instruments whose value is derived from an underlying asset such as bonds…

Q: Which of the following is TRUE about liquidity? a. All assets should be put in liquid asset so that…

A: The simplicity with which an asset, or security, might be changed into immediate cash without…

Q: The CAPM states that expected returns depend on an asset’s loading on market risk.

A: CAPM stands for capital asset pricing model. This model was developed by William. F. Sharpe. As per…

Q: “Even in an efficient market, it is still valid to seek out a ‘favourable’ rate of return from an…

A: An efficient market is one in which all information provided by the company with respect to their…

Q: if asset A has lower volatility than asset B, then it contributes less to the overall volatility…

A: Volatility is change in expected rate of assets from the mean return and it shows the risk involved…

Q: Let rf be the risk free rate of interest. E[r e ] be the expected return of some risky asset.…

A: CAPM: CAPM is also called as Capital assets pricing model. Factors affecting CAPM return are risk…

Q: According to the capital asset pricing model (CAPM), fairly priced securities should have…

A: As per the capital asset pricing model, Stock return can be calculated as under Stock Return = Risk…

Q: . When you use a historical risk premium as your expected future risk premium, what are the…

A: When using a historical risk premium as the expected future risk premium, one is assuming that the…

Q: Market risk ________. a. is equal to the rate of return generated by a risk-free asset b.…

A: By simple diversification the total risk can be reduced but can not be totally eliminated. The…

Q: which one is correct please confirm? Q2: "An increase in the volatility of the underlying asset,…

A: if we applied in options the higher the given shift over then the given time period, the higher the…

Q: An investor must look not only at the over-all return of a portfolio but also the risk of that…

A: The risk-return trade-off argues that when risk grows, so does the possible reward. Individuals…

Q: 1. In general, financial assets that have a(n). amount of risk have a rate of return.

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: In contrast to the capital asset pricing model, arbitrage pricing theory:a. Requires that markets be…

A: The capital asset pricing model or CAPM shows the relationship between the expected return and risk.…

Q: According to the capital asset pricing model, assets with Lower; lower; unsystematic Higher; higher,…

A: Solution:- Capital Asset Pricing Model (CAPM) is the equity model to determine the required rate of…

Q: An investment requires a total return that comprises: a real rate of return and compensation for…

A: Total return in case of an investment comprises of a real rate of return, compensation for…

Q: What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of…

A: Jensen's alpha is a single number that describes the predictive ability of a fund manager. The…

Q: In general, the the correlation between asset returns, the the risk reduction that investors can…

A: Correlation measures the extent to which two variables are interrelated. The correlation coefficient…

Q: Listen An example of the no-arbitrage principle holding would be when all risk-free investments…

A: In a scenario where the no-arbitrage principle holds, risk-free investments should offer investors…

Q: Which one of the following statements is correct? Group of answer choices The lower the average…

A: Risk premium: It is the difference between the expected returns and risk-free market rates. Correct…

Question

If investors speculate in derivative contracts rather than in the underlying asset, they will probably
achieve returns, and they are exposed to relatively _ risk.
lower; lower
lower; higher
higher; lower
higher; higher

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Under prospect theory, the shape of the utility function implies that investors are____________. A) Always risk averse B) Risk seeking when it comes to losses C) Always risk seeking
Investors require a _____ return as compensation for taking ____ risk. A) higher, margin B) higher, more C) higher, convexity D) lower, margin E) lower, more F) lower, convexity
1. An estimation by marginal investor, a higher expected return is earned on A. more risky securities B. less risky securities C. less premium D. high premium
What does Jensen's alpha measure? a. An investor's reward in proportion to their assumption of systematic risk b. The abnormal return of an asset, defined as the degree to which its actual return exceeds that predicted by the capital asset pricing model c. The degree to which diversifiable risk is eliminated d. How much reward an investor is getting for each unit of risk assumed
Why would a risk- averse (likes to avoid risks)type of investor prefer fixed income over equities?
Which one of the following statements is correct? Group of answer choices The lower the average return, the greater the risk premium. The greater the volatility of returns, the greater the risk premium. The lower the volatility of returns, the greater the risk premium. The risk premium is not affected by the volatility of returns. The risk premium is unrelated to the average rate of return.
Market risk ________. a. is equal to the rate of return generated by a risk-free asset b. cannot be eliminated, as it is non-diversifiable c. is synonymous with diversifiable risk d. is synonymous with financial risk
Using a payback period rule tends to bias investors toward Select one: a. riskier investments. b. less risky investments. c. longer-term investments. d. shorter-term investments. e. lower return investments.
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…
Is the following statement true or false. Briefly explain your answer. é fe̟s cm "There can not be a universally risk-free asset for all investors." [Hint: Think about investor's investment horizon vs. the asset's time to maturity, inflation, etc.]
Equity price risk is the risk that arises from security price Choose. - the risk of a Choose.. v in the value of a Choose... v or a portfolio. Equity price risk can be either systematic or Choose. v risk. In a global economic crisis, equity price risk is Choose.. because it affects multiple assets Choose. volatility decline classes. increase specific systematic security
An investment with a high return is likely to be high riskA. TrueB. False