How can an investor eliminate Systematic risk?

Q: Clearly explain why some risks are systematic and others non-systematic. How is it possible for an…

A: There are various types of risks that are faced by organizations in order to conduct its day to day…

Q: How is the risk-adjusted discount-rate approach more commonly practiced in the real world?

A: Risk adjusted discount rate approach is an approach which is used in assessment of various long-term…

Q: Can an investor eliminate market risk from a common stock portfolio?

A: There are two types of Risk 1. Systematic  Risk:- These are risk pertains to Industry as a whole not…

Q: Which of the following risks can be eliminated through diversification? a. Systematic risk b.…

A: Idiosyncratic risk is a risk for a particular investment or company. It is also called unsystematic…

Q: Can the goal of maximizing the value of the stock conflict with other goals, such as avoiding…

A: In corporation the maximize the value of shareholders wealth is basic objectives of management of…

Q: Does a greater risk imply a bad investment?

A: Risk is the degree of uncertainty about the expected return from an investment. It is the…

Q: The unbiased expectations theory assumes investors are: A. Risk seeking В. Risk neutral C. Risk…

A: The theory assumes that the investors are risk neutral

Q: Why a risk taker (likes to take risk) type of investor prefer equities over fixed income?

A: Risk takers are the individuals who are willing to take risk besides the consequences comes with it.…

Q: Indicate why you agree with justifications to the following statements:  “An investor should be…

A: Risk are of systematic and unsystematic.

Q: The capital asset pricing model (CAPM) contends that there is systematic and unsystematic risk for…

A: Introduction : In simple words, capital asset pricing model or CAPM can be understood as a valuation…

Q: What is Pure Risk and Speculative Risk ? Give me some examples What is Fundamental and particular…

A: Risk refers to the probability of loss that could occur due to the volatility present in the…

Q: How does the emergence of interest-rate risk helpexplain financial innovation?

A: Interest rate risk is defined as the risk that is faced by the bond holders because of the changing…

Q: Why might the stock price changing make sense within the context of risk and return?

A: Stock price movement is dependent on various factors which would eventually impact the required rate…

Q: When would individual equity securities be a better choice over ETFs for a risk adverse investor?…

A: There are various alternatives available for investment. Equity security and ETFs are also an…

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: Indicate why you agree or disagree with justifications to the following statements: - “An investor…

A: Diversified portfolio- It refers to a portfolio of investments in which unsystematic risk or firm…

Q: Can the risk premium be negative after an investment is undertaken or before?

A: The risk premium is the extra risk-free return to require the risk of project acknowledgment. This…

Q: How is risk defined and measured? How might the magnitude of the market risk premium impact…

A: In financial terms, the risk is referred to as the possibility that an outcome's actual gains will…

Q: Does greater risk imply a bad investment?

A: Risk assessment is the process for identifying and assessing risks associated with achieving your…

Q: Hedging is a risk management strategy that is used in limiting or offsetting probability of loss…

A: Financial risk managers analyse the market trend and accordingly take financial decisions. Roles and…

Q: Even if behavioral biases do not affect equilibrium asset prices, why might it still be important…

A: Answer: There exist two reasons why the behavioral biases do not impact equilibrium asset prices.…

Q: is passive stock investing the superior approach?

A: Active investing is when the money is invested in investment stocks that have been selected by a…

Q: If we are speaking about the CAPM model and undiversifiable risks.    Then what is meant by…

A: CAPM model The Capital asset pricing model (CAPM) refers to an idea that describes the systematic…

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: Explain with examples how a firm can hedge its risks using options

A: Hedging : Hedging can be understood as the  technique for risk management used to mitigate…

Q: What is the difference between pure arbitrage and risk arbitrage?

A: Pure arbitrage refers to make a riskless profit without taking any risk while risk arbitrage refers…

Q: What is meant by the phrase natural hedging againstexchange rate risk?

A: Hedging is a mechanism that is used to eliminate or minimize the risk of loss that is associated…

Q: of investor prefer fixed income

A: Risk-Averse-: Some investor who is a Risk-Averse has the trait of inclining toward preventing loss…

Q: Explain if the operational risk is considered a risk or uncertainty? Why? If it is a risk, how can…

A: Operational Loss:   The risk involved in failures of Man, Machine, Material, and Methods during…

Q: What would the SML look like if investors werecompletely indifferent to risk—that is, had zero risk…

A: Security market line (SML): It could be a line represented on a chart that serves as a graphical…

Q: Explain what is meant Market Risk and by Specific risk. How can an investor reduce these risks?

A: Risk is referred to as the chance that an outcome or an investment's actual gains will differ from…

Q: What is idiosyncratic risk? How does it differ from market risk?

A: Idiosyncratic risk or unsystematic risk or specific risk is that risk which belongs to specific…

Q: MNCs generally do not need to hedge because shareholders can hedge their own risk.

A: A global corporation is one that has operations in multiple countries. These companies are typically…

Q: What is liquidity black holes?

A: Liquidity is when assets can be easily traded in the market with no compromise in the price of the…

Q: 4 What is  counter party risk? Which financial contracts does it apply to?

A: The type of risk under which there are possibilities that either of the parties will not be able to…

Q: Is the following statement true or false. Briefly explain your answer. “There can not be a…

A: Risk-free assets refers to financial assets which doesn’t carry any risk with return associated to…

Q: What type of security can be used to minimize both price risk and reinvestment riskfor an investor…

A: The term price risk refers to the increase or decrease in the price of the bonds as a result of…

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

A: Market Risk is the risk that may create a loss on the financial assets or investments due to…

Q: Why are investors risk-averse? How can investors deal with different degrees of risk?

A: In the world of investment, the risk is price volatility. A volatile investment may either make you…

Q: How should derivatives be used in risk management? What problems can occur?

A: Derivatives are financial instruments that have values derived from other assets like stocks, bonds,…

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: Which of the following Incoterms (EXW, FCA, DPU, DAP) are in favor of the buyer in terms of risk?…

A: FOLLOWING INCOTERMS- EXW -EX WORKS FCA-FREE CARRIER DPU-DELIVERED AT PLACE UNLOADED DAP-DELIVERED AT…

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.