Question

1. What is the difference between the transactions demand for money and speculative demand for money? 2. What is the measure of risk? How can we explain it? 3. How according the theory we define Risk aversion, Risk preference, Risk indifference? 4. What characteristics of bonds equities determine their risk? 5. What is the condition for optimal portfolio selection? 6. How the risk aversion influences on the portfolio selection? How could we estimate the investor’s risk preferencies?

Answer 1

Ans1) According to Keynes, the demand for money has three main factors-

•The transactions motive -Claim money for regular transactions using it as a means of trade.
•The prudential motive – Request for cash for contingencies unforeseen.
•The speculative motive is triggered by uncertainty about the monetary value of other properties , i.e. the desire for capital to take advantage of investments which may occur in the future.

Ans2)By the word risk we mean the potential future consequences of a current decision being plural and the probabilities and dimensions of the consequences are known in the form of a frequency distribution. Variability refers to the chance. It is usually calculated by standard deviations or beta coefficients in financial analysis. Technically risk can be characterised as a situation in which potential consequences of the decision are known.Danger consists of demands that generate income variations. Price and interest are the key factors contributing to the risk. External and internal factors also affect risk. External threats can not be regulated and have an extensive impact on investment.

Ans3)The word "risk averse" identifies an investor who prefers to conserve capital rather than to achieve a higher rendement than normal.Danger equals price volatility in investment. You can make your savings rich or devour them from a risky investment. A gradual, steady growth of conservation investments over time.Low hazard means balance. A low risk investment ensures a decent if unspectacular return and is likely to lose almost null of the initial investment.The return on low-risk investment usually correlates to or over time slightly exceeds inflations. An investment at a high risk may benefit or lose a package of cash.

• RISK PREFERENCE:  Risk preference generally refers in economics and finance to the tendance to select action involving more variation in possible currency outcomes, compared to another choice with smaller outcomes variations (but with similar expected value). Risk preference is your tendency to choose a risky or less risky option.

• Risk indifference :

The risk attitude, where there would be no change in return, is necessary to improve risks. An indifference curve reflects the risk and return combination that an investor accepts for a certain usefulness level. Indifference curves are "north-east" for risk-averse investors as an investor must be offset by higher returns and the higher risk.

Ans 4)Bonds mean high-security debt instruments that allow an institution to raise funds and meet the criteria for capital. This is a type of debt that individual investors take advantage of for a certain tenure.The investor can take into account many characteristics of bonds. Certain intrinsic factors, as stated below, can be attributed to the popularity of this debt instrument.
•Value of face:
Face value means the price of one unit of a bond issued by a corporation. Alternatively, the principal, nominal or par value applies to the bond price. Emitters are legally obligated after a given time to refund this value to the investor.
•Coupon or interest rate:
Bonds are paid to the creditors on a regular basis and have fixed or floating interest rates during their tenure. In accordance with the practise of claiming interest on paper bonds in the form of coupons, bond interest rates are often called coupon rates.
•Tenure of bond:
Tenure or concept implies the period of maturity of the bonds. There are arrangements between issuers and investors on financial debt. An investor or creditor's legal and financial obligations to an issuer are only valid until the end of the tenure.

•Stability – Bonds are investment tools that produce guaranteed returns compared with other investment options. They offer investors an insight into the volatility of equity returns that is low in risk. Although stock dividend incomes are typically higher than coupon returns, obligations are comparatively inelastic compared to cyclical shifts in the sector.

Ans5) In assumptions of excess returns, the optimum portfolio is linear and in inverse relation to the variance covariance matrix. It represents a trade-off between the means and excess returns on volatile assets and variations / covariances.A portfolio that offers the highest return and lower risk will be the proper target for the portfolio creation. There was a mistake. A portfolio of this kind will be known as the best portfolio. The selection process is defined as portfolio selection the optimal portfolio.

Ans6) We find that various asset groups, such as shares, inventories and products, provide varying levels of risk and returns for investors. We also realize, however, that not all investors are similarly in favor of these investment options. A high return equity stock may be sufficient for one investor; however, another investor may want to prevent such an investment.
This is due to various investors' attitudes to risk.
A fund manager may take into account the risk profile of its investors and aim to align its portfolio investment with the same risk-return profile of financial instruments.This principle is known as an aversion to risk. In general, aversion to risk applies to
an investor's behavior, rather than less risk. An investor that is at risk is:Prefer less than the greater risk for
a certain anticipated rate of return Only if projected
returns are higher accepted.

P.S : i hope you have got all the answers to your questions. Please give me a thumbs up? if you are satisfied with the answers, it will be a great source of motivation for me.