Question

The phenomena and behaviors discussed above are based on the assumption that the majority of investors are risk averse. According to the concept of risk aversion, Check all that apply.

1. An investor will assess the riskiness of a security, and then determine his or her appropriate rate of return.

2. An investor will assess the rate of return offered by a security, and then determine the corresponding riskiness of the security.

Answer 1

here the first option is applied well with the fact that CAPM model is based on this assumption only in which we take Beta means the systematic risk of the security as given and then determines the rate of retrun required on the particular security according to risk involve into the security if the security having the higher beta value that means its requred rate of return will be higher than the security hving the lower beta value. Hence the 1. An investor will assess the riskiness of a security, and then determine his or her appropriate rate of return. is ncorrect one