Risk means, in today's language, the probability of something bad happening or an unfortunate outcome. Risk in finance, however, is defined as the variance of the probability distribution of returns. a.) Why do these definitions seem contradictory? b.) Reconcile the two ideas.

Risk means, in today's language, the probability of something bad happening or an unfortunate outcome. Risk in finance, however, is defined as the variance of the probability distribution of returns. a.) Why do these definitions seem contradictory? b.) Reconcile the two ideas.

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter12: Corporate Valuation And Financial Planning

Section: Chapter Questions

Problem 3Q

See similar textbooks

Related questions

Q: Why will the standard deviation not be a good measure of risk when returns are negatively skewed

A: The standard deviation of returns is a measure of the volatility of market returns and determines…

Q: standard deviation of historical returns Market beta Tracking error risk Discuss in what scenario…

A: In financial terms, risk can be defined as the possibility that the real profits from an outcome or…

Q: When investing for a long term, investors care about the volatility of A. mean, average B. mean,…

A: Volatility is used to measure the tendency of security in stock exchange wherein the security price…

Q: there is uncertainty about monetary outcome and you are concerned about return and risk, then all…

A: Yes agreed to that above statement that there is no need of entire data distribution but standard…

Q: Which of the following statements about expected rate of return is most correct? The weighted…

A: EXPECTED RETURN = RISK FREE RATE + BETA X MARKET RISK PREMIUM.

Q: Standard deviation is measure of total risk while BETA is measure of systematic, undiversifiable…

A: Because you have asked multiple questions, we will solve the first question as per policy. Request…

Q: (Net income ∕ Total assets)

A: Operating Profit Margin: It shows the performance of the firm in generating operating profit from…

Q: What are the risk implications for an investor for a returns series that exhibits fat tails?

A: Fat tails means that there are more than three standard DEVIATION movements more than normal…

Q: What are the real risks of an adverse financial outcome, especially in the short run?

A: Risk is the important factor of investment decisions to explain the capability of an investor to…

Q: Which is risk in the context of financial decision making and performance? Does performance…

A: Risk in the perspective of financial decision making and performance differs as the company faces…

Q: What does the term “risk” mean in the context of capital budgeting; to what extent can risk be…

A: Capital budgeting is a process whereby a firm or an investor evaluates all the long-term…

Q: Which of the following is not a method for incorporating risk analysis into capital budgeting? a.…

A: Capital budgeting is a process of evaluating various investment proposals. The various capital…

Q: Some financial theorists consider the variance of the distribution of expected rates of return to be…

A: The variance of expected rates of returns describes a measure of the dispersion of real/actual…

Q: Instruction: For each statement, begin by answering whether the statement is true or false. If you…

A: Since you have posted the question with multiple sub-parts, we will solve the three first three…

Q: In conducting a sensitivity analysis, the only parameter that represents a measure of worth is:a.…

A: Sensitivity analysis A financial model which helps in determining how the target variables get…

Q: If two returns are positively related to each other, they will have a ________, and if they are…

A: In the given question we are given 4 options regarding a statement and we need to choose correct…

Q: Which of the following statements is true for compensation of risk? a. Higher the risk, lower is the…

A: The Statement for compensation of risk is as under-

Q: Explain Minsky’s Financial Instability Hypothesis and mention the assumptions of the model.

A: The financial instability model hypothesis is a financial and economical model that has been…

Q: Briefly describe what is the low tail risk in econometrics

A: The question is based on the concept of portfolio risk and distribution of portfolio risk.

Q: If we are speaking about the CAPM model and undiversifiable risks. Then what is meant by…

A: CAPM model The Capital asset pricing model (CAPM) refers to an idea that describes the systematic…

Q: iation of a security’s historical returns increases an investor’s underst

A: A standard deviation is a tool used in finance to measure the volatility and risk associated with a…

Q: A financial risk is not possible to evaluate with Select one from the following options. mean value…

A: Financial risk is the risk or probability of loss made on an investment. There are various inputs…

Q: Market risk is referred to as: systematic risk. total risk. diversifiable risk. asset specific…

A: Answer 1. Market risk is referred to as? Market Risk: When an investor might lose money because of…

Q: Which of the following statements about the mean-variance criterion is correct? The mean return…

A: Analysis of amount of risk taken for a given asset's expected return with another asset's variance…

Q: Examine (i) the relation between market returns and investor sentiment, and (ii) the relation…

A: the relationship between the market returns investor sentiment and conditional volatility is stated…

Q: predict

A: Financial planning is always a challenging task for nay company & the things become even more…

Q: Which of the following is true of risk-return trade off? A) Risk can be measured on the basis of…

A: Risk are there in financial world but no return exists in financial world without risk.

Q: What would the SML look like if investors werecompletely indifferent to risk—that is, had zero risk…

A: Security market line (SML): It could be a line represented on a chart that serves as a graphical…

Q: How does the risk return trade-off relate to the financial manager's main goal?

A: The main goal for a financial manager is to generate the maximum value of the firm to its owners.…

Q: What does beta represent? Multiple Choice Beta is a measure of covariance standardized by the…

A: Beta of a stock measures the volatility with relation to the overall market. Market has a beta of 1,…

Q: Explain, with the aid of an equation, the conditions under which variances of stock returns are…

A: As an investor, Construction of an optimal portfolio of investment is important. When constructing…

Q: What does the term risk aversion mean, and howis risk aversion related to the expected return on…

A: Introduction: Risk can be characterized in terms of the uncertainty of future consequences resulting…

Q: Why are investors risk-averse? How can investors deal with different degrees of risk?

A: In the world of investment, the risk is price volatility. A volatile investment may either make you…

Q: In the context of the capital asset pricing model, the systematic measure of risk is captured by…

A: Risk can be both systematic and unsystematic

Q: The risk of a portfolio is the variance of its return. However, the variance of the returns of an…

A: The risk of a security or portfolio is measured in terms of variance. Variance is the measure of…

Q: You are a risk-averse investor. Would you therefore invest in financial assets that have a high or a…

A: The risk-averse investors are those investors who prefer the lower return with lower risk instead of…

Q: Explain what is meant by beta. What risk does beta measure? What is the market return? How is the…

A: Beta is measure of risk and volatility of stock.

Q: why can variance/volatility of returns be a misleading measure of risk for an individual asset held…

A: The portfolio reflects a combination of assets which will provide with the benefit of elimination of…

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…

Q: For which type of risk do you get rewarded with a higher expected return? a. Firm-specific risk b.…

A: Total risk = systematic risk + unsystematic risk

Q: what does high value of standard deviation mean on risk-return ratio

A: Risk-return ratio is the ratio which shows the risk which an investor will get for having one unit…

Question

Risk means, in today's language, the probability of something bad happening or an unfortunate outcome. Risk in finance, however, is defined as the variance of the probability distribution of returns.

a.) Why do these definitions seem contradictory?

b.) Reconcile the two ideas.

Expert Solution

This question has been solved!

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

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

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

Some financial theorists consider the variance of the distribution of expected rates of return to be a good measure of uncertainty. Discuss the reasoning behind this measure of risk and its purpose.
1. Define the components of holding period return. Can any of these components be negative? 2. How do you understand an investment risk and what statistic tools can be used to measure it?
A3) Finance Which one is a financial risk? Select one: a. Uncertainty about demand b. uncertainty about cost d. None of the above
Explain the difference between financial risk andbusiness risk.
Give a definition of a "return". Why do we need to incorporate risk into return (discount rate)?
Could you explain the term "financial risk" in simple terms
List which of the following statement(s) concerning risk are correct? 1. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.
Market potential is an example of an economic risk measure. O True O False
1) Which statement best describes the concept of risk? A) Under a situation of risk, future outcomes can be expected to have only one value. B) Under risk situations there can only be one possible outcome, but with array of potential returns. C) Under uncertain situations, future outcomes can be expected to have only one value. D) Risk describes a situation where there is not just one possible outcome, but an array of potential returns.
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.
If we are speaking about the CAPM model and undiversifiable risks. Then what is meant by returns which are not captured by the market return.
Which of the following statements about payback (payback period) is most correct? a. Payback is a measure of time breakeven. b. Payback is a rough measure of risk. c. Payback is a rough measure of liquidity. d. Both a. and b. are correct. e. Answers a., b., and c. are all correct.