Is it reasonable to ignore IDIOSYNCRATIC RISK and care only about MARKET (SYSTEMIC) risk? What about investors who put all their money into only a single risky stock...is that prudent and can they ignore idiosyncratic risk?

Is it reasonable to ignore IDIOSYNCRATIC RISK and care only about MARKET (SYSTEMIC) risk? What about investors who put all their money into only a single risky stock...is that prudent and can they ignore idiosyncratic risk?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 4QTD

See similar textbooks

Related questions

Q: what is meant by “The money market is necessary but not sufficient for the liquidity of securities…

A: Solution- The money market is an organized exchange market where participants can lend and borrow…

Q: If you want to buy a particular stock but are worried thatdemand from investors could push the price…

A: you want to buy a particular stock but are worried thatdemand from investors could push the price to…

Q: JWing Is FALSE regarding the Efficient Market Hypothesis? ) In general, the Efficient Market…

A: The Efficient Market Hypothesis: The Efficient Market Hypothesis (EMH) or the Random Walk Theory is…

Q: what better to suggest in terms of investing, to invest in a low risk outlet such as the money…

A: To answer the above question one needs to understand what is a low-risk outlet and what is a…

Q: Why do you think so much emphasis is placed on cash-flow-based stock evaluations, especially the…

A: Free cash flow is referred to as the cash available for the firm after meeting its obligations. The…

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: In theory, only systematic risk matters for the required return of a stock. Why does non-systematic…

A: Systematic risk refers to those which impacts the whole market rather than on particular stock…

Q: What is risk? Although many risks (e.g., career risk, risk of how many children to have and whether…

A: The risk may be defined as the possibility of uncertain events that can be harmful to the…

Q: *which of the following statements is true? Select one: O Investors sell a stock when required…

A: When the stock is overvalued, which means the market price of stock is more than the intrinsic value…

Q: What is meant by efficient market hypothesis? The third form of EMH, which suggest that all type of…

A: Efficient Market Hypothesis (EMH) states that market has all the information been factored in the…

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: If a given investor believes that a stock’s expected return exceeds its required return, then the…

A: Required rate of return is the minimum return which an investor expect on its investment. This is…

Q: Why would an advocate of the efficient market hypothesis believe that even if many investors exhibit…

A: Efficient market hypothesis is a theory according to which shares are correctly priced. According to…

Q: Why doesn’t a volatile stock price necessarily imply irrationalpricing?

A: Introduction: Volatile is nothing but a variation that is not constant. Volatile stocks are such…

Q: tock price volatility makes stock options less valuable because of risk aversion O True O False

A: Stock option can be bought with very little premium to be paid.

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: 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: True or false : The market is inefficient because some investors in the market suffer from…

A: Solution- People usually make financial selections that are coloured by behavioral biases that…

Q: You are a risk-averse investor who is considering investing in one of two economies. The expected…

A: Expected return shows estimated return which can be received from the investment or securities.…

Q: Was the creation of the subprime issue good for the stock market or bad (trick question?)? Good for…

A: The us subprime mortgage crisis was considered as multinational financial crisis that occured…

Q: According to the efficient market, which of the following are not true? Select one: securities…

A: Efficient market hypothesis is a hypothesis that states that markets are efficient and returns…

Q: Why might stockholders be indifferent to whetheror not a firm reduces the volatility of its cash…

A: Stockholders will be indifferent if the firm does not reduce the volatility of cash flows because…

Q: How can an investor eliminate Unsystematic Risk?

A: There are two types of risks: 1) Systematic risk 2) Unsystematic risk. Systematic risk is non…

Q: Given that higher-risk investments, such as small-company stocks, have outperformed other…

A: It is first important to understand the objective of investment in different asset classes and…

Q: Which of the following statements is FALSE? When a buyer seeks to buy a stock, the willingness of…

A: Option D is False. If the profit opportunities from having private expertise are large, other…

Q: Choose only one answer and explain the rationale in one or two sentences. 1. Which of the following…

A: Since, you have asked multiple question, we will solve the first question for you. If you want any…

Q: How can an investor eliminate Systematic risk?

A: There are two types of risks: 1) Systematic risk 2) Unsystematic risk

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: Which of the following is NOT correct with respect to the Efficient Market Hypothesis? O If markets…

A: Analysis of all the options: 1) In case of semi strong form efficient-any new information is…

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: Which of the following is FALSE about the semi-strong form of market efficiency? All publicly…

A: The semi strong efficiency theory follows that because all information that is public is used in…

Q: Do you think investors can earn abnormal returns in financial markets that are at least semi…

A: Semi strong efficiency is a situation where all the public information about the stock prices is…

Q: If most participants in the stock market do not follow what is happening to monetary aggregates,…

A: Stock market is the place where various financial securities such as common stocks, preference…

Q: What are the implications of the efficient market hypothesis for investors who buy and sell stocks…

A: The efficient market hypothesis or efficient market hypothesis is also known as the random walk…

Q: Why is it reasonable to ignore diversifiable risk and care only about nondiversififiable risk? What…

A: Diversifiable risk is that risk that can be easily diversified by making the investment into…

Q: As an investor, how well do you think you could handle thevolatility of the stock market, knowing…

A: Volatility: It is the measure of changes in the stock prices due to market forces.

Q: what better to suggest in investing, to invest in a low risk outlet such as the money market or to a…

A: What to invest in will depend on factors like the investment goal of the concerned person, his/her…

Q: You buy a stock from the capital market. If the capital market is semi-strong efficient, which of…

A: When the capital market is semi strong efficient then it means that in the market the share prices…

Q: Changes in stock prices are impossible to predict from public information.

A: The efficient market hypothesis refers to the market which is efficient and leaves no chance of…

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: If efficient markets hypothesis is correct, the price of a stock can be predicted ahead of time with…

A: Step 1 Stocks always trade at their fair value on exchanges, according to the EMH, making it…

Q: If you are worried that a panicked market might causethe price of one of your stocks to plunge, what…

A: In order to mitigate trading risk in the stock market and to secure the position held by the…

Question

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions

Why is it reasonable to ignore diversifiable risk and care only about nondiversififiable risk? What about an investor who puts all of his money into only a single risky stock? Can he properly ignore diversififiable risk?
The small firm effect refers to the observed tendency for stock prices to behave in a manner that is contrary to normal expectations. Describe this effect and discuss whether it represents sufficient information to conclude that the stock market does not operate efficiently. In formulating your response, consider: (a) what it means for the stock market to be inefficient, and (b) what role the measurement of risk plays in your conclusions about each effect.
In a few sentences, answer the following question as completely as you can. We routinely assume that investors are “risk-averse return-seekers” (i.e., they like returns and dislike risk). If so, why do we contend that only systematic risk is important? Alternatively, why is total risk, on its own, not important to investors?
You buy a stock from the capital market. If the capital market is semi-strong efficient, which of the following statements is NOT correct? a. You cannot earn any abnormal returns above the required return by trading on public information. b. Past stock prices can be used to predict future stock prices. c. The technical analysis of publicly available information will not lead to any abnormal returns. d. The stock is fairly priced. e. Stock prices reflect all publicly available information.
Suppose a public company compensates its risk averse managers with stock awards rather than stock options, and the company's stock price has fallen precipitously. In this setting, using stock awards will induce more risk taking by management versus the use of stock options. Question options: a) True b) False
Given that higher-risk investments, such as small-company stocks, have outperformed other investments over time, why don’t all investors choose to invest only in these high-risk securities? (Answer the question correctly and in-depth.)
What would the SML look like if investors werecompletely indifferent to risk—that is, had zero risk aversion?
How investors handle risk is an important topic that usually only economists observe.
What is the difference between a diversifiable riskand a nondiversifiable risk? Should stock portfoliomanagers try to eliminate both types of risk?
Which of the following is FALSE about the semi-strong form of market efficiency? All publicly available information is reflected in stock prices Fundamental analysis can help investors to outperform the market Technical analysis cannot be used to outperform the market Only private information can help investors to outperform the market
in broad terms, why are some risks diversifiable? Why are some risks non- diversifiable? Does it follow that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk? Substantiate your answer with real world examples
According to the efficient market, which of the following are not true? Select one: securities are in equilibrium prices fully reflect all public information available the investors should not waste their time on under- or over-valued securities None of the answers are correct the market has demonstrated that stocks are not reasonably priced.