Discuss how the free-rider problem aggravates adverse selection and moral hazard problems in financial markets.

Q: How do transaction costs and asymmetric information hinder the growth of financial markets?

A: Transaction cost : transaction cost are expense incurred when buying or selling goods or services.…

Q: Discuss the implications of the efficient market hypothesis for financial managers and security…

A: An efficient market hypothesis is defined as the hypothesis, which used to state that the share…

Q: what is risk and return in the context of financial decision making?

A: Risk and return are two very important concept used in any financial decision making. Two financial…

Q: Explain the problems of adverse selection and moral hazard caused by asymmetric information. How can…

A: A financial institution is a corporation or person who acts as another go for different parties in…

Q: What sorts of factors might limit the ability of rational investors to take advantage of any…

A: Firstly, we understand the meaning of all technical term Pricing errors: - pricing errors mean when…

Q: discuss the harmful effects of illusion of control bias to investors

A: Behavioral finance studies the impact of an investor's psychology on its investment pattern.…

Q: What is illusion of control bias in investing? Give one example of it and how to overcome it. Thank…

A: The illusion of control bias means the tendency of human beings to believe that they are capable of…

Q: What does it mean for a financial market to be considered (a) informationally efficient and (b)…

A: The financial market is a market where investors and traders buy and sell securities at a low price…

Q: In theory, market risk should be the only “relevant” risk. However, companies focus asmuch on…

A: Stand-alone risk: Stand-alone risk is the risk related with the anticipated project cash flow. The…

Q: Give one example of overconfidence bias in investing and how to overcome it. Thank you!

A: Overconfidence bias can be defined as the overestimation of skills and abilities by an individual.…

Q: Which failures in risk management systems have had catastrophic consequences in financial markets?…

A: The risk management executives have acquired expanded consideration and interest as of late, both…

Q: What information is considered a necessary evil in constructing an investment policy statement?

A: Provide appropriate guidance on portfolio construction and management Maintain focus on the…

Q: Why does behavioral finance considered investors as "normal" yet biased and errors? Support being…

A: Behavioural Finance is the branch of Behavioural economics which deals with the behaviour and…

Q: How behavorial bias affect investment behavior?

A: Behavioral bias is the belief by the investors that unknowingly affects the investors investment…

Q: What is the difference between business risk and financial risk?

A: Risk Analysis: The risk analysis is defined as the process of recognizing the potential problems…

Q: Are there any novel ways by which some of the challenges in the financial system may be resolved in…

A: Following are the ways by which some of the challenges in the financial system may be resolved in…

Q: Describe some of the motives and mistakes made by the investors?

A: Investors are driven by different motives when taking decision to make investment in specific…

Q: What is investor overreaction? Which behavioral bias is primarily responsible for this effect, and…

A: Before going to give solution we need to know about some basic terms like investors. Investor is the…

Q: Define and explain the agency problem in terms of differences in ability to diversify risk by…

A: Agency problem occurs when there is a conflict of interest when manager is in dilemma to serve the…

Q: Discuss the importance of hedging to the financial risk manager Are there any downside to hedging?

A: Hedging in money alludes to ensuring speculations. Support is a speculation status, which targets…

Q: Explain how pure risk has an adverse effect on the economy

A: Pure risk is one of the major type of risk which is beyond the control and can affects the economy…

Q: What does it mean to say that managers should maximize shareholders' wealth "subject to ethical…

A: The main focus of the manager should be maximizing the shareholder’s wealth. More profit indicates…

Q: What are the ethical considerations in making subjective valuations of these complex…

A:

Q: What is risk? Why must risk as well as return be considered by the financial manager who is…

A: Risk is associated with every business it is one of the important functions of the management to…

Q: What is the risk in the context of financial decision making and performance?

A: Financial decision making: Financial decision making denotes to decision making concerning financial…

Q: Why does behavioral finance considered investors as "normal" yet biased and errors? Support being…

A: Behavioural Finance is the branch of Behavioural economics that deals with the behavior and…

Q: Compare the assumptions and the predictions of the varieties of capitalism (VOC) literature with…

A: The distinction between the liberal market economies is made by using varieties of capitalism.

Q: What are the disadvantages of the financial intermediaries and the negative ways they can impact the…

A: A financial intermediary is that entity that acts as a middleman in a financial transaction taking…

Q: discuss why financial markets should be regulated

A: Financial markets is the market which is in-fact actually not a physical market where is the goods…

Q: critically discuss why financial markets should be regulated in terms of  asymmetric information,…

A: Financial market is taking asymmetric information, As it involved one of the two parties, they take…

Q: market mispricing creates arbitrage opportunities, is this true and how. the actions of…

A: Mispricing causes a divergence between the market price of a security and the fundamental value of…

Q: what happens if a company doesn't manage risk ?

A: Risk management is important part of carrying the business activities. There are different types of…

Q: Why is there a need to manage risk in financial institutions?

A: A financial institution (FI) is a firm that specializes in financial activities, including deposits,…

Q: In the presence of the ‘free rider’ problem ,private markets will always produce inefficient…

A: Answer

Q: What are some determinants of business risk?

A: Business risk is referred as the exposure of risk factors towards a company or a business which…

Q: What is hedging and how is it different from diversification? If a firm needs to manage its risk,…

A: A hedge is an investment that is made fully intent on diminishing the danger of unfriendly value…

Q: discuss the advantages and disadvantages of options in the financial market

A: Options are financial instruments which derives its value from an underlying asset. The buyer of the…

Q: Suggest what is the best financial instrument to offset market risk exposure and from market…

A: Derivatives are considered as the best financial instruments to offset the exposure of market risk…

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.