- a. What is meant by the investor’s required
rate of return ? - b. How do we measure the riskiness of an asset?
- c. How should the proposed measurement of risk be interpreted?
1.
To discuss: The meaning of investor’s required rate of return.
Explanation of Solution
The meaning of investor’s required rate of return is as follows:
The required rate of return is the return of an investor which is important to invite an investor to buy or hold a security.
2.
To discuss: The ways to measure the riskiness of an asset.
Explanation of Solution
The ways to measure the riskiness of an asset is as follows:
Risk is the potential fluctuation in returns on an investment. Therefore, the higher the vulnerability or uncertainty with regards to the specific result, the higher is the risk. The risk might be estimated as far as the standard deviation of rate of return or by the variances of rates of return, which are just the squared values of the standard deviation.
3.
To discuss: The ways proposed measurement of risk is interpreted.
Explanation of Solution
The ways proposed measurement of risk is interpreted is as follows:
Higher standard deviation of returns demonstrates higher risk related with the investment. The future cash flows have a higher potential variation. Though, regardless of whether the standard deviation is huge comparative with the returns must be inspected as for other investment opportunities. On the other hand, the probability analysis is an important methodology to deal with catch higher comprehension of the vastness of a standard deviation figure.
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Chapter 6 Solutions
Foundations Of Finance
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