Professor Lsedere (lzzy) bvest-e-et retred two yeerssge from berptiena. College,

Question

Professor Lsedere (lzzy) bvest-e-et retred two yeerssge from berptiena. College, mal libere.rts college in Connect at after beecing crente finance and investment theory for 35 years. Yesterday, lrry eppeer on CLIVE, a television show produced for the students, faculty and steff on the CU camps nd the locai communitiBarbara Bigher is re host of ec Lrve, and one of professor tmy's former ,tudents. The folowing is a transcript of the interview. Unfortunately the software that transcribes tre interview into witten form failed to understand several words and phrases used in the interview. To complete the transarigt and demonstrate your knowledge of the risks and returrs of investing, please select the beit answer from each drapdown m Barbara Good moning, Professor Invest-a-Lot rd like to welcome you to ec uw, and thank you for coming in today to offer us insights int te bases of investin, I remember your course well, and whán my grades ddn't alw refect greet sucress, interested in the maberial and the possiblity of using the concepts and techniques when the oppartunities arose "lways very Izzy Good moming, Barbara, and please call me, Ezzy. Thank yau for the invitation to discuss one of the important fundamentals to sound nvesting: an appreciation of the relationship between the oejective ar outcome of your investment, that is i Barbara Let's begn wth markets generaily assumed to react to risk? And, how do the markets define "risk? generaization regning the fnancal markets How are people burng and selling nvestments in the finangal Izzy Risk is best thought of as the potental for wanability in the investment's outcomes This means that if investment has the while if there is more than one possible return r pobential bo provide only one possible outcome or return, then it is resut, then the asset should be considered This is why securties seld by the U.S. Treasury have historically been securries in the world because except in the event of the falure of the U.S government, any investor holding a Treasury security would receive the securily's face value upon its maturity. Nost investors have an expected outcome associated with an inwestment, and risk refers to the potential for recelving an outcome or returm thet is greater or less than his or her expected reburn It is not surprising that investors returns that exceed their expected return, but they tend to respond differently the investret can generate lower return. This potenitial for recelving investment This does not general, the majority of investors, or those buying and selling seartes, are assumed to be thet they wont purchase or sell risky securities or prejects, it imply means that they premium or additional return for taking on prejects or securities exhibiting adational risk Barbara So investers require a given amount of return for investing in a risk-free investment, and then require an additional rsk premium i they invest in projects or securities that exhibit risk7 is that conrect? zzy That's absolutely correct And the magnitude of the risk premium w investment increasesSo the riskiest investments require the as the amount of risk exhibited by the isk gremiums, and investments exhibiting relatively ttle Barbara OK, that makes sense, but how do you know how risky an investment is Izzy It ends on how many investments you hold. If you hold only one nvestment-not just one type, such as one house, one car, one avings accounit, but one of all possible investments then you can measure the riskiness of that investment by calcuilating the of the inwestment's possible retums youre holding a portfollo of assets, on the other hand, then the risk that is of greater interest is the riskiness, and how thhe beation of new security er asset would affect the overal riskiness of the portfelio. This tmgsus torelated concept: the advantages and disadvantages of Barbara This is related to the notion of not putting al of your eggs inone basket, isnt 7 Doesnt it mean just holding a bunch of securities rather than only one or two? That way if the value of one stock goes down, its loss seill be offset by the pains exhibited by the other secunities in the portfolio. Right? xry Not exactly Effective diversification requires knowledge of the extent to which the returns of an asset exhbit the seme changes, increases or decreases over time, as the returns of anather asset or group of assets. Notice that it is not the magnitude of reburn that is important in this case, but the degree to which their movements are synchronized over time. This tendency to move together is measured by the assets exhibit the identical pattern over time. In contrast, assets that are the exactly opposite pettern generate returns that generabe returns that exhibit Anather way of thinking about the risk-reduction benelits of diversfication is to focus on the standard deviations of the assets. If the standard deviation ef the reburns of an asset being added to a portfolios return, then the riskiness of the portfolo wil increase, rather than decrease, which contrary to the goal of diversi ation. than the standand deviation of the portfoio's should be noted, however, that during the period of 19A8to 19the oomsation coefficient for most pairs of randomly selected us, companies was 0.28. This means that the addition of randomly selected us. company to portfolio of other us. corporations should the riskiness of the portfolia, Barbara trry, this is facinating discussion. Would that ft into your schedule? mUnfortunatey our brne is up, but I'd ikn very much for you to come back next week to antiue our Izzy Of course, material discussed today and is intended to reinforte some of the important concegts. Have tun, and l see you next weekd and I look fonsard to Rl However, before 1 leave, I'd like to ask you and the audience to take a pop quiz. It addresses the L. The financial performance of an investment is best expressed as a: O Dellar amount, since it clearly identifies the sum of money that can be spent by the owner of the investment Q Percentage, snce it scales, or andardizes, the return canned from the nvestment by the investment's size. Dellar amount, since t reflects the Biming of the investment's return O Peroentage, as it ignores the timing of the return, such as one year or ten years 2. In genaral, it is reasonable to expect that holding a portfolio conssting of both international and domestic assets, rather than domestic stocks alone, will provide greater riak-reduction berents due tD which of the folowing factors? Q The differing economic, regulatory, and political systems expose done and international securities to different, and potentially thetting, sources and amounts of market risks. While the domestic and fareign companies share common sources of diversifable risk, the dfferences in market risk cen stil cause their petterns of returns to dffer sufficeny to offer mal risk-reduction benefits O The dffering ecenomic, regulatory, and political systems expose domestic and ietemational securities to offerent, and potentially offisetting, sources and amounts of diversifiable and market risks. This can cause the seourities to generate independent or offsetting patterrs of returrs 3. Two securities. A end the current price of B are expected tp be worth100.00 in one reer. Decause A nsker than , the ament pnce of A should be

Explanation / Answer

return
riskless or riskfree
risky
safest or risk-free
are happy
negative
risk-averse
like or want
increase
highest
lower
standard deviation
market or incremental or marginal
diversification
correlation coefficient
positive correlated
negatively correlated
more
reduce or lower

1. Option B-percentage since it scales or staandardises the return earned from the investment by the investment's size

2. Option B

equal

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.