Chapter 6, Problem 1RQ

1. a. What is meant by the investor’s required rate of return?
2. b. How do we measure the riskiness of an asset?
3. c. How should the proposed measurement of risk be interpreted?

Summary Introduction

To discuss: The meaning of investor’s required rate of return.

Explanation of Solution

The meaning of investor’s required rate of return is as follows:

The required rate of return is the return of an investor which is important to invite an investor to buy or hold a security.

Summary Introduction

To discuss: The ways to measure the riskiness of an asset.

Explanation of Solution

The ways to measure the riskiness of an asset is as follows:

Risk is the potential fluctuation in returns on an investment. Therefore, the higher the vulnerability or uncertainty with regards to the specific result, the higher is the risk. The risk might be estimated as far as the standard deviation of rate of return or by the variances of rates of return, which are just the squared values of the standard deviation.

Summary Introduction

To discuss: The ways proposed measurement of risk is interpreted.

Explanation of Solution

The ways proposed measurement of risk is interpreted is as follows:

Higher standard deviation of returns demonstrates higher risk related with the investment. The future cash flows have a higher potential variation. Though, regardless of whether the standard deviation is huge comparative with the returns must be inspected as for other investment opportunities. On the other hand, the probability analysis is an important methodology to deal with catch higher comprehension of the vastness of a standard deviation figure.