A- How do investors “demand” to be compensated for risk? B - Why are not investors...

A- How do investors “demand” to be compensated for risk?

B - Why are not investors compensated for diversifiable (unsystematic) risk?

Solutions

Expert Solution

Answer A)- Investors Demand compensated for Risk:- A risk premium is the return in excess of the risk-free rate of return an investment is expected to yield; an asset's risk premium is a form of compensation for investors who tolerate the extra risk, compared to that of arisk-free asset, in a given investment.Investors expect to be properly compensated for the amount of risk they undertake in the form of a risk premium, or additional returns above the rate of return on a risk-free investment such as U.S. government-issued securities. So we can say that how much Investors Demand that much they are talking Risk.

Answer B)- Diversifiable risk- Investment risk that can be reduced or eliminated by combining several diverse investments in aportfolio. Non-market (non-systemic) risks are diversifiable risks.b because an investor can skip the Diversifiable risk by diversification of the investment so that the Investors are not compensated for Diversifiable risk.

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