Risk and Return: IntroductionRisk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event willoccur, and there is a trade-off between risk and return. The higher an investment's risk, the-Select-the return required toinduce investors to purchase the asset. This relationship between risk and return indicates that investors are risk; investors dislike risk and require -Select- Vrates of return as an inducement to buy riskier securities. Arepresents the additional compensation investors require for bearing risk; it is the difference betweerthe expected rate of return on a given risky asset and that on a less risky asset. An asset's risk can be considered in two ways:On a stand-alone basis and in a portfolio context.-Select--Select-

Risk and return are foundational concepts in finance, representing the dynamic relationship between…

isk and Return: Introduction isk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event will ccur, and there is a trade-off between risk and return. The higher an investment's risk, the-Select-the return required to duce investors to purchase the asset. This relationship between risk and return indicates that investors are risk -Select- ✓; investors dislike risk and require-Select- rates of return as an inducement to buy riskier securities. A -Select- represents the additional compensation investors require for bearing risk; it is the difference betwee he expected rate of return on a given risky asset and that on a less risky asset. An asset's risk can be considered in two ways: On a stand-alone basis and in a portfolio context.

isk and Return: Introduction isk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event will ccur, and there is a trade-off between risk and return. The higher an investment's risk, the-Select-the return required to duce investors to purchase the asset. This relationship between risk and return indicates that investors are risk -Select- ✓; investors dislike risk and require-Select- rates of return as an inducement to buy riskier securities. A -Select- represents the additional compensation investors require for bearing risk; it is the difference betwee he expected rate of return on a given risky asset and that on a less risky asset. An asset's risk can be considered in two ways: On a stand-alone basis and in a portfolio context.

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 5QE

See similar textbooks

Similar questions

An increase in the riskiness of a particular security would NOT affect: Select one: A. The risk premium for that security B. The premium for expected inflation C. The total required return for the security D. Investors' willingness to buy the security
Which is correct about security valuation? A. In an efficient market, several factors would affect the market and value is not necessarily equals the price. B. The value of the security is determined to compare it with the current market price and usually investor would buy when the value equals the price. C. Sellers would prefer the accept lower bid price than higher bid price to realize gains. D. Investors buy securities when securities are underpriced and sell them when it is overpriced. E. All of the above F. None of the above
help please
(I) The market price of a security at a given time is the highest value any investor puts onthe security. (II) Superior information about a security increases its value by reducing its risk.a) (I) is true, (II) is false.b) (I) is false, (II) is true.c) Both are true.d) Both are false.
A reduction in the willingness of investors to take on risk would have what effect on the Security Market Line? A.no effect B.rotate the SML counter clockwise around the risk-free rate C.rotate the SML clockwise around the risk-free rate D.shift the SML upward, parallel to its previous location
Hedging is a risk management strategy that is used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. REQUIRED: Discuss the importance of hedging to the financial risk manager Are there any downside to hedging?
Which one of the following statements is correct concerning unsystematic risk? An investor is rewarded for assuming unsystematic risk. Beta measures the level of unsystematic risk inherent in an individual security. Eliminating unsystematic risk is the responsibility of the individual investor. Standard deviation is a measure of unsystematic risk. Unsystematic risk is rewarded when it exceeds the market level of unsystematic risk. оо O O
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. You invest $100,000 in 40 stocks, 20 bonds, and a certificate of deposit (CD). What kind of risk will you primarily be exposed to? Stand-alone risk Portfolio risk Generally, investors would prefer to invest in assets that have: a high level of risk and low expected returns. a low level of risk and high expected returns.
What happens to the price and return of a security when investors recognize it as undervalued? Explain.
Market risk is portion of a security's stand-alone risk that cannot be eliminated through diversification. True False
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
QUESTION Hedging is a risk management strategy that is used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies. REQUIRED: Discuss the importance of hedging to the financial risk manager Are there any downside to hedging?