To Determine: To respond to the given statement.
Statement: “Risky security do not have expected return lesser than the risk-free rate since no risk-averse investor is willing to hold an asset in equilibrium”.
Introduction:
Beta is the risk related with a portfolio or a security in connection to the market. It is also termed as the beta coefficient; it is a method for deciding on the requirement on security or stock that may move in contrast with the market. Expected Return is a process of estimating the
Want to see the full answer?
Check out a sample textbook solutionChapter 11 Solutions
Loose Leaf for Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
- If the assumptions underlying the CAPM hold, then an implication from the model is that: A) investors are irrational B) the market portfolio is efficient C) no risk-premiums are expected from bearing systematic risk D) risk-premiums are expected from bearing firm-specific riskarrow_forwardThe CAPM implies that heterogeneous agents hold the same risky portfolio a) even if they differ in their risk aversion b) even if they face constraints on leveraging. Explain whether it is TRUE, FALSE or UNCERTAIN.arrow_forwardWe understand standard deviation of returns as a measure of risk and rational investors would like to minimize risk. Notwithstanding this, you may have read that as the standard deviation of returns of the underlying asset increases the value of an option rises. If standard deviation is a measure of risk and investors do not particularly like it, why does it lead to an increase in an option's value?arrow_forward
- After combining a riskfree asset with the efficient frontier of risky portfolios, you no longer need to know an investor's preferences over risk and return to identify the risky portfolio they should hold. Group of answer choices True Falsearrow_forwardAnswer whether each of the following statements is correct and explain your argument. \ (a) According to CAPM, the expected return of a risky asset is larger than the risk free rate. (b) According to CAPM, the expected return of a risky asset increases with its variance. (c) According to the separation property, the optimal risky portfolio for an investor dependson the investor’s personal preference. (d) A less risk-averse investor has a steeper indifference curve for the utility function.arrow_forwardWhat type of security can be used to minimize both price risk and reinvestment riskfor an investor with a fixed investment horizon? Does this security protect the realpayoff? Explain.arrow_forward
- Assume that CAPM does not hold and securities may earn abnormal returns. Suppose security A has a lower alpha than security B, which statement below is TRUE: Group of answer choices Security A has a lower expected return than security B Security A has a lower abnormal return than security B Security A has lower total risk than security B Security A has a lower total return than security Barrow_forwardIn the context of CAPM, a risky asset with negative beta (beta<0) will have a positive expected excess return. (Assuming investors are risk-averse.) True or False?arrow_forwardIn 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?arrow_forward
- How can an investor eliminate Unsystematic Risk?arrow_forwardWhat assumption about risk-adjusted techniques for measuring performance poses a potential problem? A. Portfolio risk is constant over time B. Returns are normally distributed C. Mean reversion D. None of the options are correct.arrow_forwardIf we are speaking about the CAPM model and undiversifiable risks. Then what is meant by returns which are not captured by the market return.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT