Question

When considering stand-alone risk, the return distribution of a less risky investment is more peaked (“tighter”)...

When considering stand-alone risk, the return distribution of a less risky investment is more peaked (“tighter”) than that of a riskier investment. What shape would the return distribution have for an investment with (a) completely certain returns and (b) completely uncertain returns? What are the two types of portfolio risk? How is each type defined? How is each type measured?

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Answer #1

In case of a completely certain return: vertical & spike.

In case of completely uncertain return: horizontal line.

Two types of portfolio risks are corporate risk & market risk.

Corporate risk: it is defined as risk of a business project where they are considered as part of business’s portfolio of projects.

Market risk: this is defined as the risk of a business project where they are considered as a part of individual investor’s well diversified portfolio of securities.

Corporate risk is measured by projects corporate beta & market risk is measured by a project’s or a stock’s market beta.

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