Question

Which of the following statements concerning financial risk is false?

              a.           Generically, financial risk is related to the probability of a return less than expected.

              b.           If an investment is held in isolation (stand-alone), the appropriate measure of risk is the beta coefficient.

              c.           In theory, you can create a riskless portfolio by combining a large number of investments whose returns are uncorrelated (independent of one another).

              d.           In the real world, it is not possible to create a riskless portfolio because all investment returns, to a greater or lesser extent, move with the overall economy.

              e.           Assume you know for certain that an investment will return negative 10 percent. (In other words, the probability of a -10% return is 100 percent.) Although the expected return is negative, the investment is riskless.

Answer 1

(FALSE) e : Assume you know for certain that an investment will return negative 10 percent. (In other words, the probability of a -10% return is 100 percent.) Although the expected return is negative, the investment is riskless.

Explanation:

a) Financial risk is related to the probability of a return less than expected, because if the investment gives the return less than expected return that indicate the risk in the investment is high.

b) When an investment is held in isolation then the appropriate measure of risk is the beta coefficient because it gives us the estimation that how the security value change in corrosponding change in the value of the market.

c) We can create a riskless portfolio by combining a large number of investments whose returns are independent of one another because if any one perticular investment goes down then other investment will not show the similer downfall or trend as they are independent.

d) In the real world, it is not possible to create a riskless portfolio because all investment returns, to a greater or lesser extent, move with the overall economy because it is a very complex process and almost impossible to have any investment having zero probability of loss.

e) If the probability of a -10% return is 100 percent, although the expected return is negative, the investment is riskless. The given statement is false because if the expected return is negative, the investment will considered to a risky investment not a riskless investment.