Question

1). Why do non-investment grade bonds have much higher direct costs than investment grade issues?

2). I critically evaluated the following statement: Investing in the stock market is the same as gambling. Such a speculative investment has no social value apart from the pleasure that people find in this kind of gambling.

3). In general terms, why are some risks diversifiable? Why are others not? What can be concluded that an investor can control the level of unsystematic risk in a portfolio, but not the level of systemic risk?

Please add some references

4). What would a technical analyst say about market efficiency?

Answer 1

Answer 1.

The non-investment grade bonds have much higher direct costs as compared to the investment-grade issues as the non-investment grade bonds are exposed to higher default risk. This is the core reason behind the higher return expectation by the investors.

Answer 2

Unlike gambling, the stock market is a positive sum game; everybody can win. Also, speculators provide liquidity to markets and thus help to promote efficiency.What happens in the stock market is based on underlying economic events. Gambling is purely playing the odds.

Answer 3

Some of the risk in holding any asset is unique to the asset in question. By investing in a variety of assets, this unsystematic portion of the total risk can be eliminated at little cost. On the other hand, there are systematic risks that affect all investments. This portion of the total risk of an asset cannot be costlessly eliminated. In other words, systematic risk can be controlled, but only by a costly reduction in expected returns.

refrences :-

a)      Short-term interest rates increase unexpectedly. :-  systematic

b)      The interest rate a company pays on its short-term debt borrowing is increased by its bank.-:  unsystematic

c)      Oil prices unexpectedly decline.:-  both; probably mostly systematic

d)     An oil tanker ruptures, creating a large oil spill. ;- unsystematic

e)      A manufacturer loses a multimillion-dollar product liability suit. :- unsystematic

f)       A Supreme Court decision substantially broadens producer liability for injuries suffered by product users. :- systematic

Answer 4

A technical analyst would argue that the market is not efficient. Since a technical analyst examines past prices, the market cannot be weak form efficient for technical analysis to work. If the market is not weak form efficient, it cannot be efficient under stronger assumptions about the information availible.