Question

Explain the concepts of company unique risk and market risk, and how the total level of...

  1. Explain the concepts of company unique risk and market risk, and how the total level of a portfolio’s risk can change by adding stocks to a portfolio.
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Solution :

Market Risk : Market risk is the risk that an investor can experience due to investing in the market. This risk can not be diversified and this is also called as systematic risk.

Company unique risk : This risk is called unsystematic risk and this risk is specific to the company and it can be diversified.

Total level of portfolio risk can be changed by adding stocks to the portfolio as new stock will have different level of risk and correlation with the existing portfolio. If there is a negative corelation then the overall risk can be reduced. Suppose if we have only one industry stocks in our portfolio and when we add one stock from other industry then overall risk will be reduced as portfolio is more diversified now.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
a) Explain the concepts of variance (total risk) and beta (systematic risk) in portfolio theory and...
a) Explain the concepts of variance (total risk) and beta (systematic risk) in portfolio theory and the capital asset pricing model. b) Discuss why according to the capital asset pricing model that total risk should not be rewarded by the capital market. You may use diagrams in your explanation if you wish.
As the number of stocks in a portfolio is increased: Select one: a. unique risk decreases...
As the number of stocks in a portfolio is increased: Select one: a. unique risk decreases and becomes equal to market risk b. market risk decreases c. unique risk decreases and approaches zero d. total risk approaches zero
Systematic risk Select one: a. is unique to a company or industry. b. describes the total...
Systematic risk Select one: a. is unique to a company or industry. b. describes the total risk of a stock or fund. c. All of these are true statements. d. is a risk that affects a large number of stocks. e. is also known diversifiable risk.
Systematic risk Select one: a. is unique to a company or industry. b. describes the total...
Systematic risk Select one: a. is unique to a company or industry. b. describes the total risk of a stock or fund. c. All of these are true statements. d. is a risk that affects a large number of stocks. e. is also known diversifiable risk.
According to Markowitz portfolio theory a. a portfolio with the minimum risk for its level of...
According to Markowitz portfolio theory a. a portfolio with the minimum risk for its level of expected return lies on the efficient frontier b. combing any two risky assets in portfolio will reduce unsystematic risk compared to a portfolio holding one of two risky assets c. The investor who invest in both bonds and stocks should have more risk than the investor who invest in bonds only d. adding a risky stock to a (less risky) bond portfolio can reduce...
Assume that CAPM is a good representation of the risk-return relationship. You are holding a portfolio...
Assume that CAPM is a good representation of the risk-return relationship. You are holding a portfolio of stocks. The portfolio’s standard deviation is 40% and its correlation with "M" is 0.8. The risk free rate is 2.5%, the expected market return is 12%, and the standard deviation of the market return is 17.6%. What is the expected return on your portfolio? Is this portfolio efficient? How can you tell? If this portfolio is not efficient, how much risk reduction could...
1. Pick 4 stocks and create a portfolio. Discuss how and why the combination will reduce...
1. Pick 4 stocks and create a portfolio. Discuss how and why the combination will reduce portfolio risk compared to holding these stocks individually and separately. What would be the portfolio’s beta? (You can find stock’s beta on each stock’s homepage at http://finance.yahoo.com (Links to an external site.)Links to an external site.) Is your portfolio still subject to market risk? And why? 2. Discuss and comment on CAPM(Capital Asset Pricing Model). Give an example of it.
An investor currently holds the following portfolio of 4 stocks, each having equal weight: Stock Expected...
An investor currently holds the following portfolio of 4 stocks, each having equal weight: Stock Expected Return (rs) Beta A 13.2% 1.70 B 12.00% 1.5 C 6.0% 0.5 D 7.8% 0.8 a. What is the portfolio’s expected return? b. What is the portfolio’s beta risk? Is it more or less risky than the market? c. Is the portfolio more or less risky than the market? How do you know? The investor is not comfortable with holding a portfolio that has...
1. Which term has a different meaning than the others? Diversifiable risk Unsystematic risk Market risk...
1. Which term has a different meaning than the others? Diversifiable risk Unsystematic risk Market risk Nonsystematic risk Firm-specific risk 2. Systematic risk is also called _____. Check all that apply: market risk non-diversifiable risk common risk fundamental risk 3. Nonsystematic risk is also called _____. Check all that apply: random risk unsystematic risk firm-specific risk diversifiable risk 4. Diversification is _____. It _____. the mixing of different assets within a portfolio; reduces overall portfolio risk buying more than three...
Please consider all that we have learned thus far regarding the impact of diversification, risk-free securities,...
Please consider all that we have learned thus far regarding the impact of diversification, risk-free securities, and market premiums. With that in mind, Please describe how adding a risk-free security to modern portfolio theory allows investors to do better than the efficient frontier. Additionally, explain how might the magnitude of the market risk premium impact people's desire to buy stocks?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT