Question

In: Economics

An investor wishes to measure the investment risk presented by an asset which has the following...

An investor wishes to measure the investment risk presented by an asset which has the following distribution:                   

State   Return   Probability                       

1       10%         0.5                      

2        20%        0.3

3        50%        0.2   

(i) Evaluate any three different measures of investment risk for this asset. Where necessary, you may assume a benchmark return of 25%.     

(ii) State two key properties of Value at Risk (VaR).

Solutions

Expert Solution


Related Solutions

An institutional investor wishes to sell part of their bond portfolio. Which of the following risk...
An institutional investor wishes to sell part of their bond portfolio. Which of the following risk factors is most significant in affecting the cost of this transaction? Credit risk Liquidity risk Reinvestment risk
An investor wishes to purchase a 1-year forward contract on a risk-free bond which has a...
An investor wishes to purchase a 1-year forward contract on a risk-free bond which has a current market price of £97 per £100 nominal. The bond will pay coupons at a rate of 7% per annum half-yearly. The next coupon payment is due in exactly 6 months, and the following coupon payment is due just before the forward contract matures. The 6-month risk-free spot interest rate is 5% per annum effective and the 12-month risk-free spot interest rate is 6%...
The market in which Inaho trades has three possibilities for investment: • a risk-free asset with...
The market in which Inaho trades has three possibilities for investment: • a risk-free asset with the continuously compounded, risk-free interest rate equal to r; • a risky asset whose price is denoted by S(t),t ≥ 0 and whose dividend yield is δS; • a risky asset whose price is denoted by Q(t),t ≥ 0 and whose dividend yield is δQ. Initially, the market prices of assets S and Q are equal. Inaho opens a one-share short position in the...
Investor attitudes toward risk Erik is an investor with $5,000 available for investment. He has the...
Investor attitudes toward risk Erik is an investor with $5,000 available for investment. He has the following three investment possibilities from which to choose: Option Scenarios 1 Keep the $5,000 in cash for one year. 2 Invest in a friend’s business with a 50% chance of getting $10,000 after one year and a 50% chance of getting nothing. 3 Invest in a relative’s business with a 30% chance of getting $15,000 after one year, 20% chance of getting $2,500 after...
Both Beta in the CAPM and the standard deviation measure the risk of any asset. Which...
Both Beta in the CAPM and the standard deviation measure the risk of any asset. Which of these measures best captures the risk of an asset when we think about the return we expect from that asset? Explain. plz explain more detail, thx!!!
(01) Safety-First ratio measure excess return per unit of risk in an investment asset.             (a)...
(01) Safety-First ratio measure excess return per unit of risk in an investment asset.             (a) TRUE             (b) FALSE (02) Legal and regulatory requirements and tax incentives favor holding fixed-income      securities.             (a) TRUE             (b) FALSE (03) The relation between risk tolerance and risk aversion are zero             (a) TRUE             (b) FALSE (04) Risk aversion of 6 to 8 represent low degree risk aversion and a high-risk tolerance.             (a) TRUE             (b) FALSE (05) When...
Which of the following types of risk is the least important risk for a diversified investor?...
Which of the following types of risk is the least important risk for a diversified investor? A:) systematic risk B:) Undiversifiable risk C:) market risk D:) idiosyncratic risk  
Consider Asset A and B, which asset has higher systematic risk? Which one has higher total...
Consider Asset A and B, which asset has higher systematic risk? Which one has higher total risk? Show your calculations. Assume the market risk premium is 8 percent, the risk-free rate is 4 percent, and the capital asset pricing model holds. (Rounding your answers to four decimal places) State of Economy Probability of State of Economy Rate of Return if State Occurs Asset A Asset B Recession 0.10 0.02 -0.25 Normal 0.70 0.25 0.09 Irrational exuberance 0.20 0.05 0.40
Which one of the following statements is false? Beta is a measure of risk. "Market risk...
Which one of the following statements is false? Beta is a measure of risk. "Market risk premium” and “return on the market” are the same thing. CAPM is an acronym for Capital Asset Pricing Model. A disadvantage of using the dividend growth model to estimate the cost of equity is that it does not explicitly account for risk. You should not use the coupon rate on outstanding debt as the cost of debt in WACC.
ACI wishes to determine the required return on asset A, which has a beta of 1.5....
ACI wishes to determine the required return on asset A, which has a beta of 1.5. The risk-free rate of return is 9%; the return on the market portfolio of assets is 4%.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT