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

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: When describing the attitude of investors towrds risk, which statement is correct? A.Investors may…

A: Risk attitude of an investor can be classified into three category i.e. risk seeker, risk averse and…

Q: How do an investment's required rate of return vary with perceived risk? Explain with an example?

A: Required rate of return refers to the rate which the investors expects from their investments. This…

Q: How does the magnitude of firm-specific risk affect the extent to which an active investor will be…

A: The question is based on the role of risk factor in selection of portfolio, which is simply…

Q: How do margin trades magnify both the upside potential and the downside risk of an investment…

A: Margin trades refer to the trades in which an investor does not need to pay the full amount to take…

Q: What assumption about risk-adjusted techniques for measuring performance poses a potential problem?…

A: RISK ADJUSTED TECHNIQUES  Investors want to look beyond performance when evaluating portfolios…

Q: What is the expected return on a portfolio? How can the expected return on a portfolio be…

A: Expected Return on Portfolio  =( Weights of Stock 1 * Return of Stock 1) + ( Weights of Stock 2 *…

Q: Why a risk taker (likes to take risk) type of investor prefer equities over fixed income?

A: Risk takers are the individuals who are willing to take risk besides the consequences comes with it.…

Q: A criticism of the CAPM is that it: А. utilizes too many factors. В. ignores the risk-free return C.…

A: CAPM provides an explanation on relationship between systematic risk and expected return on assets.

Q: How would the risk premium work out for a riskier investment?

A: A risk premium is a return on venture over the hazard free rate a financial specialist requires to…

Q: In what circumstances would you use one of the available risk measurements used in Modern Portfolio…

A: Modern portfolio theory refers to the theory of investment that allows the investors for…

Q: What is the expected return on a portfolio? How can the expected return on a portfolio be…

A:

Q: In the context of CAPM, a risky asset with negative beta (beta<0) will have a positive expected…

A: CAPM describes the relationship between risk of security and expected return. CAPM is the expected…

Q: Why does the limitation of Portfolio analysis is It suggests the use of standard strategies that can…

A: The portfolio is basically a set of various financial instruments that are owned by an individual or…

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: Which of the following is true according to the pure expectations theory? Forward rates:a.…

A: The theory of forward interest rate would be equivalent to the anticipation of savers on future…

Q: Which of the following is NOTa potential problem when estimating and using betas, i.e., which…

A: The question is based on the concept of business finance.

Q: Suggest what is the best financial instrument to offset market risk exposure and from market…

A: The question is based on the concept of hedging the market risk and volatility by use of a proper…

Q: How does the diversification of an investor’s portfolio avoid risk?

A: Portfolio investments mean investments in the group of assets, securities, bonds, etc. Investments…

Q: We understand standard deviation of returns as a measure of risk and rational investors would like…

A: Option is a future right not an obligation to sell or buy the underlying asset or security at a…

Q: How can an investor eliminate Unsystematic Risk?

A: There are two types of risks: 1) Systematic risk 2) Unsystematic risk. Systematic risk is non…

Q: Which of the following is NOTa potential problem when estimating and using betas, i.e., which…

A: The changes that taken place in the portfolio or securities would be considered as beta. This would…

Q: What is the expected return of a zero-beta security?a. Market rate of return.b. Zero rate of…

A: Expected return: Expected returns are proceeds or losses that a depositor anticipates to attain…

Q: Is it true that the the wider the risk premium, the lower the price of a expected future cash flow?

A: Risk premium is the return the stock gives over the risk free asset. risk premium = Rs-Rf Wider risk…

Q: How can an investor eliminate Systematic risk?

A: There are two types of risks: 1) Systematic risk 2) Unsystematic 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 is idiosyncratic risk? How does it differ from market risk?

A: Idiosyncratic risk or unsystematic risk or specific risk is that risk which belongs to specific…

Q: What are the similarities and differences between the CML and SML as models of the risk return…

A: CML is an abbreviation for Capital Market Line and SML is an abbreviation for Security Market Line.…

Q: What is the beta for the other stock in your portfolio? What is the expected return of the risk-free…

A: Portfolio is the collection of securities or investments. It is the collection of securities…

Q: How can a firm’s managers influence market risk as reflectedin beta?

A: Beta:  It is the measurement of volatility of a stock compared to the market movements. A stock with…

Q: What type of security can be used to minimize both price risk and reinvestment riskfor an investor…

A: The term price risk refers to the increase or decrease in the price of the bonds as a result of…

Q: State whether the following statement is True or False and explain why. “The return on a risk-free…

A: FALSE

Q: In the standard model of investment management, investors care only for: a. The return and the risk…

A: The portfolio consists of a group of various financial securities that the investors invest in in…

Q: If markets are semi-strong efficient, which of the following situations is most likely to yield…

A: Market refers to a place where buying and selling of goods take place. In finance, there are…

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: Why should stock market investors ignore specific risks when calculating required rates of return? O…

A:

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: 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: What statistical concept do many portfolio managers use to represent a risk when considering…

A: The return an individual or organisation gets from any investment portfolio is termed as investment…

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

Classification Of Risk

Risk means when there could be a possibility that the returns expected from a particular project or investment may or may not match the investor's expectations. In other words, the uncertainty of an income arising from a source that would either be lower than expected or result in losses in risk exposure of the project. The higher the risk involved, the higher is the return expected by the investor as the investor is exposed to a high level of risk. There are various methods by which different types of risk can be assessed and avoided or mitigated.