DATE: Members 1. Give your opinions about this statement “Risk is a measure of uncertainty about the future payoff to an investment, assessed over some time horizon and relative to a benchmark”. a. Due to the definition of risk, risk can be avoided at any cost: ............................................................................................ ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. b. Investments with a greater variance in the size of the future payoff generally pay a lower expected return: .................... ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. c. The difference between standard deviation and value at risk is: ........................................................................................ ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. d. Risk-free investments have rates of return equal to zero ................................................................................................... ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. 2. True/ false and explain. 1 Leverage lowers the expected return and increases risk. A risk-averse investor versus a riskneutral investor: will never take a risk, while the risk neutral investor will. A risk-averse investor will: only invest in assets providing certain returns. The riskier an investment, the higher the risk premium (the higher the compensation investors require for holding it) When the home construction industry does poorly due to a recession, this is an example of idiosyncratic risk. High oil prices tend to harm the auto industry and benefit oil companies; therefore, high oil prices are an example of both systematic and specific risk. Hedging is a strategy to reduce all kinds of risks. 3. Consider an investment that pays off $800 or $1,400 per $1,000 invested with equal probability. Suppose you have $1,000 but are willing to borrow to increase your expected return. What would happen to the expected value and standard deviation of the investment if you borrowed an additional $1,000 and invested a total of $2,000? What if you borrowed $2,000 to invest a total of $3,000? ................................................................................................................................................................................ ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. 2 ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. ............................................................................................................................................................................................. 3
