If an investor's desired risk level changes over time, should the investor change the composition of his or her portfolio? How? You are a risk adverse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the portfolio? Many employees believe that their employer's stock is less likely to lose half of its value than a well-diversified portfolio of stocks. Explain why this belief is erroneous.

If an investor's desired risk level changes over time, should the investor change the composition of his or her portfolio? How? You are a risk adverse investor with a low-risk portfolio of bonds. How is it possible that adding some stocks (which are riskier than bonds) to the portfolio can lower the total risk of the portfolio? Many employees believe that their employer's stock is less likely to lose half of its value than a well-diversified portfolio of stocks. Explain why this belief is erroneous.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 4Q

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Similar questions

Given that higher-risk investments, such as small-company stocks, have outperformed other investments over time, why don’t all investors choose to invest only in these high-risk securities? (Answer the question correctly and in-depth.)
Both investors and gamblers take on risk. The difference between an investor and a gambler is that an investor Group of answer choices is normally risk neutral requires a risk premium to take on risk knows he or she will not lose money knows the outcomes at the beginning of the holding period
Which of the following statements related to risk is (are) true: (i) Beta measures risk that cannot be diversified. (ii) As more shares are included in a portfolio the total risk of that portfolio goes down. (iii) Investors are normally risk averse and, therefore, they demand a risk premium.
When you have a fixed investment horizon, it is important to maximize your earnings. You must understand the risks and returns of the security and the risk factors that can affect the price of the bond. If an investor has a fixed investment horizon, what type of security can be used to minimize both the price risk and the reinvestment risk? Does this security protect the real payoff? Explain.
The calculation of an investor's Risk Aversion (A) requires us to look at that individual investor's historic behavior in his/her investing history. Why is Risk Aversion also called "price of risk"? Group of answer choices Risk Aversion measures the risk premium that the investor has required for the Capital Market Line Risk Aversion is determined by the excess return over the risk-free asset, as required by the investor Risk Aversion measures the difference in returns required by the investor in the Capital Allocation Line versus the Capital Market Line Risk Aversion measures the amount of return that the investor has required for each unit of risk taken None of the above
What is risk? Although many risks (e.g., career risk, risk of how many children to have and whether they will succeed morally and academically, etc.) in the real world are not tradable, some risks (e.g., stock price risk, credit risk, interest rate risk, currency exchange rate risk, risks that insurance policies cover, etc.) are actively traded in the market. What determine the equilibrium price of tradable risks?
The security market line (SML) is an equation that shows the relationship between risk as measured by beta and the required rates of return on individual securities. The SML equation is given below: If a stock's expected return plots on or above the SML, then the stock's return is sufficient to compensate the investor for risk. If a stock's expected return plots below the SML, the stock's return is insufficient to compensate the investor for risk.The SML line can change due to expected inflation and risk aversion. If inflation changes, then the SML plotted on a graph will shift up or down parallel to the old SML. If risk aversion changes, then the SML plotted on a graph will rotate up or down becoming more or less steep if investors become more or less risk averse. A firm can influence market risk (hence its beta coefficient) through changes in the composition of its assets and through changes in the amount of debt it uses. Quantitative Problem: You are given the following…
According to the Capital Asset Pricing Model (CAPM), risky stocks pay a risk premium based on their level of systematic risk. Thus, a risky stock should have a higher expected return than a risk-free security unless it has a zero or negative beta. True False
As investors become more pessimistic (risk averse): Select one: a. they invest in a portfolio with a high beta. b. prices of securities fall in order to raise their expected rate of return. c. they require larger betas for taking risk. d. they require smaller premiums for taking risk.
Explain why the risk premium of a stock does not depend on its diversifiable risk. Question content area bottom Part 1 (Select the best choice below.) A. Investors don't care about diversifiable risk and so don't hold any. B. Investors care about diversifiable risk, but hedge their positions so they don't demand a risk premium. C. Although investors must hold diversifiable risk, they don't care about it, so there is no risk premium. D. Investors can remove diversifiable risk from their portfolio by diversifying. They therefore do not demand a risk premium for it.
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How does insurance-linked securities increase an investors return, without increasing risk ? Adding insurance-linked securities to a portfolio can increase an investor's return without increasing its risk because a) The investor takes pnly a specifically defined insurable risk b) The investor receives a premium rate of return c)A secondary market exists for the securities d) Insurable risk does not correlate with other types of investment risk