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How do you measure an investor's risk aversion?
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- What is a characteristic line? How is this line used to estimate a stocks beta coefficient? Write out and explain the formula that relates total risk, market risk, and diversifiable risk.Why are investors risk-averse? How can investors deal with different degrees of risk?How can an investor eliminate Systematic risk?
- If the CAPM were to hold, how would you identify the more risk averse investors?Explain the difference between (a) stand-alone risk and (b) risk in a portfolio context. How are they measured or calculated, and are they relevant to investors?Compare long-term instruments and short-term risks, in terms of the various types of risk to which investors are exposed. Justify your answer.
- What are the risk implications for an investor for a returns series that exhibitsfat tails?Explain what is the criterion used by a rational investor for choosing a financial investment in terms of its risk return combination.What is risk aversion, and how is risk aversion related to the expected return on a stock?
- How do you perceive the relationship between risk and return in the context of investment portfolios? Can you provide examples of how an investor might balance the two, and what factors influence their decision-making process in achieving an optimal risk-return profile?How do risk premiums influence financial decisions regarding risk and return?How does the risk return trade-off relate to the financial manager's main goal?
