Why should stock market investors ignore specific risks when calculating required rates of return? O There is no method for quantifying specific risks. Specific can be diversified away. Specific risks are compensated by the risk-free rate. Beta includes a component to compensate for specific risk.

Q: hich one of the following is not a property of a pure arbitrage portfolio? a. Zero investment. b.…

A: Arbitrage is buying and selling of securities in two different markets to take advantage of…

Q: Hedging is a risk management strategy that is used in limiting or offsetting probability of loss…

A: Financial risk managers analyse the market trend and accordingly take financial decisions.Roles and…

Q: What is called the called the return on a stock beyond what would be predicted from market movements…

A: Returns can be of various types

Q: which of the following is FALSE regarding portfolio diversification and risk? Market risk is also…

A: Solution What is Portfolio Diversification? Portfolio diversification is that the method of…

Q: In theory, only systematic risk matters for the required return of a stock. Why does non-systematic…

A: Systematic risk refers to those which impacts the whole market rather than on particular stock…

Q: Explain the effect of D/E on asset returns, equity returns (assuming that cost of debt is not…

A: Three main actors of production namely land, labor and capital are given primary importance. Capital…

Q: Which of the following statements related to risk is (are) true: (i) Beta measures risk that cannot…

A: Risk are of two types - systematic risk and unsystematic risk

Q: What is risk? Although many risks (e.g., career risk, risk of how many children to have and whether…

A: The risk may be defined as the possibility of uncertain events that can be harmful to the…

Q: Is it reasonable to ignore IDIOSYNCRATIC RISK and care only about MARKET (SYSTEMIC) risk? What about…

A: Definitions  Idiosyncratic risk : In simple words, idiosyncratic risk can be understood as the risk…

Q: According to the market segmentation theory, short term-term investors will not normally switch to…

A: Market segmentation theory is also referred to as segmented markets theory.

Q: Why would investors looking to have a diversified stock portfolio view a negative covariance in…

A: The correct option is:A negative covariance means the stocks would not behave the same way, which…

Q: Which of the following is not a characteristic of an efficient market? Investors can frequently…

A: Efficient Market Hypothesis is a hypothesis theory in finance which states that asset prices reflect…

Q: 1. In broad terms, why is some risk diversifiable? Why are some risks nondiversifiable? Does it…

A: Unsystematic risk is a risk that is distinctive to a particular firm or industry. Nonsystematic risk…

Q: In theory, market risk should be the only “relevant” risk. However, companies focus asmuch on…

A: Stand-alone risk: Stand-alone risk is the risk related with the anticipated project cash flow. The…

Q: 1. Which of the following statements is false? a. Risk neutrality means that an investor are not…

A: When making investments the concerned investor is looking for a desired rate of return. Risks are…

Q: Which of the following is NOT true? In risk-neutral valuation the risk-free rate is used to discount…

A: Risk-neutral valuation produces a valuation that is correct in all situations not just those where…

Q: Which is correct about security valuation? A. In an efficient market, several factors would affect…

A: The process that is used in order to determine the fair value of the security, as well as any type…

Q: Which of the following is NOT true? You might be better off using elimination approach for this…

A: Several statements have been provided about the risk neutral valuation methodologies and their…

Q: Why might the stock price changing make sense within the context of risk and return?

A: Stock price movement is dependent on various factors which would eventually impact the required rate…

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: Portfolio diversification does not affect the variability of returns of an individual stock held in…

A: True. Portfolio diversification does not affect the variability of returns of an individual stock…

Q: Which of the following statements is CORRECT? a. Portfolio diversification reduces the variability…

A: The objective of the question is to identify the correct statement among the given options related…

Q: The small firm effect refers to the observed tendency for stock prices to behave in a manner that is…

A: The small firm effect: In the financial markets, the small firm effect refers to the phenomenon that…

Q: Which of the following is true? a. Beta of a stock cannot be negative b. SML is an acronym for Stock…

A: Investors in the stock market need to have a strong understanding of various concepts related to…

Q: Strong form efficient market hypothesis states that stock prices reflects all the information in a…

A: Efficient market hypothesis has three versions - weak form, strong form and the semi-strong form.

Q: tock price volatility makes stock options less valuable because of risk aversion O True O False

A: Stock option can be bought with very little premium to be paid.

Q: The Arbitrage Pricing Theorem states that: a)If arbitrage opportunities do not exist then the…

A: Arbitrage pricing theorem or APT states that, Market returns are not perfectly efficient because of…

Q: ADAM COMPANY HAS AN OLD MACHINE THAT COST WHEN PURCHASED $150000, THE FIRM DEPRECIATION METHOD IS…

A: Hi There, thanks for posting the question. But as per Q&A guidelines, we must answer the first…

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: If the assumptions underlying the CAPM hold, then an implication from the model is that: A)…

A: The CAPM shows the relationship between the Systematic risk and the return expected by the…

Q: The general arbitrage pricing theory (APT) differs from the single-factor capital asset pricing…

A: Arbitrage Pricing theory and Capital asset pricing model are the models used for determining the…

Q: Explain why the delta hedging of a negative gamma options position loses money.

A: Delta hedging is a technique used by traders to manage the risk associated with options positions.…

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: What happens to the price and return of a security when investors recognize it as undervalued?…

A: Undervalued-If a security is selling in the market at a price below its true intrinsic value, then…

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: TRUE OR FALSE: Assuming an efficient market, two financial securities cannot have the same risk and…

A: The efficient market hypothesis states that information is quickly and accurately reflected in asset…

Q: Explain why short-term stock price and market movements appear to be difficult to predict with any…

A: The question is based on the concept of prediction of stock performance in future time. Stock market…

Q: All of the following statements about an efficient market are correct EXCEPT: a. All financial…

A: An efficient market is one in which prices reflect all available information and can be considered…

Q: Which of the followings are required assumptions for the CAPM to hold?   a   Investors can borrow…

A: Option a is correct. Investors can borrow at the risk free rate. Option b is correct. The CAPM…

Q: Diversification will reduce risk is securities returns are negatively correlated. TRUE FALSE

A: Diversification can reduce risk if securities have negative correlations because when one security's…

Q: Market neutral bets can result in ______ volatility because hedge funds use ______.  Group of answer…

A: Market-neutral bets or strategy is used to gain higher returns in all market conditions or…

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.