Define real risk-free interest rate

Q: What is Interest Rate Risk and Cash Flow Risk

A: Interest rate risk: The interest rate risk is the risk that occurs due to the change in the interest…

Q: Differentiate between price risk and reinvestment risk.

A: Price risk is the risk of decline of the price of the investment or an asset after the underlying…

Q: Is it true that current liabilities are riskier than long-term liabilities?

A: Liabilities: Liabilities are debt and obligations of a business. These are the claims against the…

Q: Define the term Risk-free real return?

A: Risk-free real return is a hypothetical number that mirrors the foreseen return on a venture that…

Q: Explain risk-free interest rate (the nominal short-term rate)

A: The Capital Asset Pricing Model describes the relationship between the projected return for assets…

Q: Define coupon interest rate

A: Coupon interest rate are the rate of interest paid on the bonds. The coupon rate is charged on the…

Q: Define required rate of return on a portfolio

A: Introduction: Required rate of return is nothing but the minimum rate that an investor would…

Q: Differentiate between (a) stand-alone risk and(b) risk in a portfolio context

A: Investors can categorize the risks in two types. One is diversifiable risk and other one is…

Q: liquidity risk?  Define briefly with an appropriate example

A: Risk means uncertainties in the future. There is a high risk involved in every investment because…

Q: o risk premiums influence financial decisions regarding risk and re

A: Step 1 A risk premium is an investment return that is expected to generate more than the level of a…

Q: Explain real risk-free interest rate

A: The interest rate in real terms is the actual interest rate after adjusting the inflation effect.…

Q: Define expected rate of return on a portfolio

A: Expected Return: The expected return is the minimum required rate of return which an investor…

Q: How does risk affect interest rates?

A: The risk and the interest rates are in a direct relationship that is, the greater the risk the…

Q: Why does standalone risk differ from portfolio risk? Explain and give examples! Relates your answer…

A: While making an investment, an investor is required to thoroughly examine all types of risks and…

Q: Define Risk Premium

A: It is defined as the distinction between the expected return for a portfolio or an investment and…

Q: Compare long-term instruments and short-term risks, in terms of the various types of risk to which…

A: Interest rate risk is the likelihood that the value of a fixed-rate debt instrument may fall when…

Q: Define the term exposure to financial risk?

A: The question is based on the concept of Financial risk and its exposure.

Q: what does Market's Risk premium measure

A: Market's Risk premium is an important term used in the capital asset pricing model equation (CAPM)…

Q: Write an equation for the nominal interest rate on any security.

A: Step 1: Nominal interest rate is a rate before considering the inflation into an account, in…

Q: What is the risk premium?

A: CAPM is the method of calculating the expected return on investment. The formula to calculate the…

Q: What security provides a good estimate of the real risk-free rate?

A: A Treasury bill (T-Bill) is the short-term liability of US public debt supported for 1 year or…

Q: What is Interest Risk and Cash Flow Risk?  What is the difference between Interest Risk and Cash…

A: Risk exists in all business operations and transactions however the business should take actions to…

Q: Define the real risk-free rate (r*). What security canbe used as an estimate of r*? What is the…

A: Answer: Real risk-free return: Real risk-free return is nothing but a minimum rate of return…

Q: Describe the process of using the risk-adjusted discount rateto calculate the net present value?

A: Net present value (NPV) is the excess of present value of cash inflows over the present value of…

Q: What is definitions of this?   Systematic risk  Risk free rate of return  Market rate of…

A: Capital asset pricing model (CAPM) can be used to compute the return expected by the investors by…

Q: Calculate and label the market risk premium

A: Security Market Line or SML is the upward sloping straight line. This line is the graphical…

Q: Which one of the following is the formula that explains the relationship between the expected return…

A: The risks which is common for all business entities operating in the economic environment then the…

Q: What is market risk premium?

A: Market risk premium is an additional return investor will receive for holding the additional risk in…

Q: Define the term Risk-Adjusted Discount Rate Approach?

A: The estimation of the present value of cash for high-risk investment is known as a risk-adjusted…

Q: Explain the difference between financial risk andbusiness risk.

A: Risk is referred as the chance of loss. An activity which leads to loss is termed as risk. The risk…

Q: What is counterparty risk?

A: Counterparty risk can exist in trading, credit, investment.

Q: what is the nominal risk-free rate

A: T-bills also known as treasury bills. T- bills are government bonds or debt securities which are…

Q: b) Give a graphical example to present the positioning of. E Systematic risk E Risk free rate of…

A: Risk is the uncertainty associated with an investment. The investor receive higher return to…

Q: What is equity risk premium?

A: The risk premium is the extra return an investor receives for taking market risk. We know that risk…

Q: Compare speculative risk and pure risk.

A: Pure Risk is the possibility where there is loss or no loss. Speculative risk  is a possibility of…

Q: Immunization is intended to protect a portfolio against interest rate risk. What should be done? How…

A: Immunization is the strategy under which the checks on the interest rates are provided to the firms.…

Q: Define market risk premium

A: Market risk premium  It is defined as a variance between an expected rate of returns on the market…

Q: risk with practical examples

A: Default risk is the risk that a lender takes on in the chance that a borrower will be unable to make…

Q: Which of the following is included inthe risk-free rate? O A. the default premium O B. the expected…

A: Risk free rate is the return on the asset that has zero risk associated to it. It is a theoretical…

Q: What is the importance of market risk premium?

A: Market risk premium Variance of the market return and the risk-free rate. It depicts the equity…

Q: Define default risk premium (DRP)

A: Generally, the interest rate charged is made up of the following components: Risk-Free Rate…

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary. 

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.