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- No matter how the stock price fluctuates, as long as it can provide a positive return, the risk of investing in stocks is low.If the concept of standard deviation is applied, is this true or false?Why will the standard deviation not be a good measure of risk when returns are negatively skewed? What are the risk implications for an investor for a returns series that exhibits fat tails? A price weighted index places more weight on stocks with a higher price, whilst a value weighted index places more weight on stocks with a higher market capitalization. Discuss.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.
- When all investors have the same information and care only about expected return and volatility; if new information arrives about one stock, can this information affect the price and return of other stocks?What is the difference between a diversifiable riskand a nondiversifiable risk? Should stock portfoliomanagers try to eliminate both types of risk?“Highly variable stock prices suggest that the market does not know how to price stocks.” Comment.
- Why would investors looking to have a diversified stock portfolio view a negative covariance in stocks as a good thing? A negative covariance means the stocks would not behave the same way, which would hedge against significant loss. A negative covariance means investors can reinvest in the stocks at a lower price. Investors don't want a negative covariance; they want a positive covariance to maximize profits. None of these answers is correct.Can an investor eliminate market risk from a portfolio of common stocks?How can you evaluate if stocks are underperforming?
- What is risk aversion, and how is risk aversion related to the expected return on a stock?In efficient markets, the rate of return on a stock should be: A. always greater than the risk-free rate B. Less than zero C. Related to the systemic risk of the stock D. Zero; no stock should earn a positive returnAccording to the Capital Asset Pricing Model (CAPM), risky stocks pay a risk premium based on their level of systematic risk. Thus, a risky stock should have a higher expected return than a risk-free security unless it has a zero or negative beta. True False