Deriv HW #1

1. According to the efficient market hypothesis (EMH), in a perfect market, the security prices reflect the true and fair value of all the underlying securities' assets at any time. On the contrary, an inefficient market is a market whose security price at any time does not entirely reflect the value of its assets. In this form of market, traders can beat the market because they can employ strategies like arbitrage and speculation. Explain with example, the price reactions towards the bad news that indicate market is inefficient.

Which of the following is not a characteristic of an efficient market? Investors can frequently make profits by predicting asset market prices that are different from intrinsic values. The market value of all securities at any one instant in time fully reflect all available information. Investors act rationally. The forces of demand and supply work to maintain that the security's market price and its intrinsic value are in equilibrium.

QUESTION  Hedging is a risk management strategy that is used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies.   REQUIRED: Discuss the importance of hedging to the financial risk manager Are there any downside to hedging?

Hedging is a risk management strategy that is used in limiting or offsetting probability of loss from fluctuations in the prices of commodities, currencies, or securities. In effect, hedging is a transfer of risk without buying insurance policies.   REQUIRED: Discuss the importance of hedging to the financial risk manager Are there any downside to hedging?

Which of the following statements about arbitrage is correct? Select one: O a. A risk averse investor will never arbitrage because of the risk involved. O b. An arbitrage opportunity arises when it is possible to exploit a pricing anomaly to make riskless guaranteed profits. O c. Arbitrage opportunities continue to exist in equilibrium. d. An investor loves to arbitrage because he/she is willing to pay a premium to buy risky assets.

Risk and Return: Introduction Risk is an important concept affecting security prices and rates of return. Risk is the chance that some unfavorable event will occur, and there is a trade-off between risk and return. The higher an investment's risk, the-Select-the return required to induce investors to purchase the asset. This relationship between risk and return indicates that investors are risk ; investors dislike risk and require -Select- Vrates of return as an inducement to buy riskier securities. A represents the additional compensation investors require for bearing risk; it is the difference betweer the expected rate of return on a given risky asset and that on a less risky asset. An asset's risk can be considered in two ways: On a stand-alone basis and in a portfolio context. -Select- -Select-

1.The coefficient of risk aversion can be used to create indifference curves. The higher the A, the steeper the indifference curve and all else equal, such investors will invest less in risky assets.  True  False 2. Insiders are able to profitably trade and earn abnormal returns prior to the announcement of positive news. This is not a violation of semi strong-form efficiency  True  False 3. At maturity of a futures contract, the spot price and futures price must be approximately the same because of marking to market  True  False 4. S ecurity X has an expected rate of return of 13% and a beta of 1.15. The risk-free rate is 5%, and the market expected rate of return is 15%. According to the capital asset pricing model, security X is ________.     fairly priced     overpriced     underpriced     in equilibrium     none of these answers 4.Consider the liquidity preference theory of the term structure of interest rates. On average, one would expect investors to…

Is the following statement true or false. Briefly explain your answer. é fe̟s cm "There can not be a universally risk-free asset for all investors." [Hint: Think about investor's investment horizon vs. the asset's time to maturity, inflation, etc.]

1. How can investors make decisions about financial instruments that involve future payoffs? a) There is no uncertainty in market economies. b) This can be done only when the future payoffs are certain. c) Prices are determined by supply and demand which is always certain. d) Investors can use probabilities and risk measurement procedures to account for all possibilities.

A reduction in the willingness of investors to take on risk would have what effect on the Security Market Line? A.no effect B.rotate the SML counter clockwise around the risk-free rate C.rotate the SML clockwise around the risk-free rate D.shift the SML upward, parallel to its previous location

Kindly answer this question as soon as possible!

What is a good response to.... A hedge is something an investor can use to mitigate risk while pursuing many different types of investments. There are also differing types of hedges. A cash flow hedge is designed to manage the risk of variability in future cash flows related to forecasted transactions. It stabilizes expected cash flows by using financial instruments to lock in rates or prices (Hoyle, 2024, p. 337). An example out of our textbook involves a company expecting to purchase raw materials in the future entering into a forward contract to lock in the current exchange rate, reducing the risk of fluctuations in currency rates (Hoyle, 2024, p. 340). A fair value hedge aims to offset the risk of changes in the fair value of an existing asset or liability due to market fluctuations. This hedge stabilizes the value of recognized items on the balance sheet (Hoyle, 2024, p. 313). A company holding a fixed-rate bond may use an interest rate swap to hedge against the risk of…

Discuss how the concept of pure security, short selling and no arbitrage profit help establish and understand the equilibrium from the capital markets. Discuss different economic determinants security prices. Kindly answer the question as soon as possible.

One of the basic promises of security analysis, and in particular fundamental analysis is that A- a stock's price is based on the cash flows it has generated in the past B- market sectors and industries do not move in concert with business cycle C- all securities have an intrinsic value that their market value will approach over time D- a security's risk has relatively litthe effect on the security's return

Equity price risk is the risk that arises from security price Choose. - the risk of a Choose.. v in the value of a Choose... v or a portfolio. Equity price risk can be either systematic or Choose. v risk. In a global economic crisis, equity price risk is Choose.. because it affects multiple assets Choose. volatility decline classes. increase specific systematic security

Although a company would never dispel gains from currency fluctuations, they truly hate accounting for the losses. This is why minimizing risk is so important. It is absolutely necessary to retain a firm’s profits from selling a product or providing a service. Please consider the following questions: What is the purpose of a hedge? How does a hedge operate? Provide an example of three hedging strategies. Of the three, which do you prefer?

Is the following statement true or false. Briefly explain your answer. “There can not be a universally risk-free asset for all investors.” [Hint: Think about investor’s investment horizon vs. the asset’s time to maturity, inflation, etc.]

1) Please indicate whether the following statements are true or false. In case of a false statement, briefly specify why the statement is false. 1. A real asset is different from a financial asset because a real asset must take a physical form. 2. In the financial market, an investor buys financial securities from dealers at the ask price and sells financial securities to dealers at the bid price. 3. Mankowitz portfolio theory assumes average investors have a utility function as an increasing and concave function of future portfolio return. 4. According to CAPM, all well-diversified portfolios on the capital market line have the same Sharpe ratio. 5. The Markowitz portfolio theory assumes that investors hold homogenous expectations about risk and returns of financial securities.

An increase in the riskiness of a particular security would NOT affect: Select one: A. The risk premium for that security B. The premium for expected inflation C. The total required return for the security D. Investors' willingness to buy the security

Whether the following statement is true or wrong. Briefly explain your answer. "It is impossible to have an asset that is risk-free for all investors.” [Hint: Consider the relationship between the investment period of investors and asset maturity, inflation and other factors.)

Short selling a.       What does it mean to short sell a security? b.       What is the risk associated with short selling. c.       When should an investor short sell? d.       How can investors sell stocks they do not own? e.       How is a short position closed?

Does the efficient market hypothesis suggest that an investor can outperform the market? What effect does the arrival of information have on the market efficiency? How rapidly do security prices change in response to new information in an efficient market?

Riskless, costless arbitrage is the cornerstone of the efficient market hypothesis. However, multiple unavoidable risks in securities markets inhibit arbitrage as defined in financial theory (and investment textbooks) from successfully eliminating mispricing. Please list two of these unavoidable risks and briefly explain how each limits arbitrage in practice. Use an example to make your case for each risk. View keyboard shortcuts

(I) The market price of a security at a given time is the highest value any investor puts onthe security. (II) Superior information about a security increases its value by reducing its risk.a) (I) is true, (II) is false.b) (I) is false, (II) is true.c) Both are true.d) Both are false.

Arbitrage is the idea that one can (select the best answer): Group of answer choices   Buy and Sell different assets or packages of assets at different prices such you can earn a riskless profit without investing any capital. Earn rates of return greater than the average for the market by successfully “picking” stocks. Earn abnormal returns above what CAPM would predict for a particular security.