what was the standard deviation of the risk premium? course hero

Which part of total risk should affect asset prices and returns?

III. Systematic risk is the only part of total risk that should affect asset prices and returns.

How many unrelated securities can be invested in diversifiable risks?

I. Diversifiable risks can be largely eliminated by investing in thirty unrelated securities.

What is the purpose of investing in three companies all within the same industry?

B. making an investment in three companies all within the same industry will greatly reduce the systematic risk.

What is risk premium?

The risk premium is the amount that an investor would like to earn for the risk involved with a particular investment. The US treasury bill (T-bill) is generally used as the risk free rate for calculations in the US, however in finance theory the risk free rate is any investment that involves no risk.

What is the difference between unsystematic and systematic risk?

In contrast, unsystematic risk is the amount of risk associated with one particular investment and is not related to the market. As an investor diversifies their investment portfolio, the amount of risk approaches that of the market.

What is risk premium?

The risk premium is the additional returns an investor will gain (or he expects to receive) from buying a risky market portfolio instead of risk-free assets.

Why do we need market risk premium?

It must be understood that market risk premium helps in assessing probable returns on an investment as compared to investment where a risk of loss is zero, as in the case of Government issued bonds, treasuries. Additional return on a riskier asset is in no way guaranteed or promised in the above calculation or by any related factors. It is the risk that investors agreed to take in return for more returns. There is a difference between anticipated returns and actual returns, one should make note of that.

Why is it important to understand the relationship between reward and risk?

It is important to understand that the relationship between reward and risk is the main reason behind market risk premiums calculations. If an asset returns 10 % every year without fail, it has zero volatility of returns or zero risks.

Is a government bond a risk free investment?

The risk-free rate is nothing but a return on investments in Government’s bond. A government bond is considered as a safe investment as a possibility of Government is getting default is very thin or almost no possibility.

When using standard deviation to measure risk in the stock market, what is the underlying assumption?

When using standard deviation to measure risk in the stock market, the underlying assumption is that the majority of price activity follows the pattern of a normal distribution. In a normal distribution, individual values fall within one standard deviation of the mean, above or below, 68% of the time. Values are within two standard deviations 95% of the time.

What Is Standard Deviation?

Standard deviation is a basic mathematical concept that measures volatility in the market or the average amount by which individual data points differ from the mean. Simply put, standard deviation helps determine the spread of asset prices from their average price.

How to determine risk of an investment?

One of the most common methods of determining the risk an investment poses is standard deviation. Standard deviation helps determine market volatility or the spread of asset prices from their average price. When prices move wildly, standard deviation is high, meaning an investment will be risky.

What is the most common metric used to assess volatility?

Traders and analysts use a number of metrics to assess the volatility and relative risk of potential investments, but the most common metric is standard deviation . Read on to find out more about standard deviation, and how it helps determine risk in the investment industry.

What can we determine from the smaller standard deviation?

So what can we determine from this? The smaller the standard deviation, the less risky an investment will be, dollar-for-dollar. On the other hand, the larger the variance and standard deviation, the more volatile a security. While investors can assume price remains within two standard deviations of the mean 95% of the time, this can still be a very large range. As with anything else, the greater the number of possible outcomes, the greater the risk of choosing the wrong one.

What does it mean when a stock has a low standard deviation?

When prices move wildly, standard deviation is high, meaning an investment will be risky. Low standard deviation means prices are calm, so investments come with low risk.

What is the most common method of determining the risk an investment poses?

One of the most common methods of determining the risk an investment poses is standard deviation.