Define the terms systematic risk and unsystematic risk. Be sure to explain the difference between the two. Which type of risk can be diversified away? How do we measure the remaining type of risk?
Evaluate the statement: "If we could just make our investment portfolio large enough, we could completely eliminate risk and earn a market portfolio rate of return with the risk of a risk-free investment."
What will be an ideal response?
Answer: Systematic risk is risk that cannot be diversified away, is measured with beta, and is the risk that impacts all stocks in an economy. On the other hand, unsystematic or diversifiable risk CAN be diversified away. This is risk that is unique to the asset and can be eliminated when combined in a portfolio of risky assets. As for our statement, we CANNOT totally eliminate uncertainty of returns just by increasing the number of risky assets that make up the portfolio: although we can eliminate unnecessary or unsystematic risk, we cannot eliminate systematic risk through diversification. Therefore, we cannot realize a risk-free investment with greater than risk-free returns.
You might also like to view...
Giving out samples of Pizza Hut products in conjunction with the debut of a motion picture that was funded by Pizza Hut is an example of:
A) sponsorship marketing B) event marketing C) specialty marketing D) a cross-promotion
All of the following statements concerning LLC's are incorrect except: ______
A) Federal income tax is due on its income as an entity. B) Income flows through to the members based on their proportionate interests in the company. C) No filing is necessary to form a limited liability company. D) All members enjoy unlimited liability.
Which of the following is the preferred strategy when a company's competitive advantage is based on technology and the company wishes to enter the global marketplace?
A. licensing B. exporting C. franchising D. creating a joint venture E. creating a wholly owned subsidiary
A major difficulty in justifying EC projects is that many costs and benefits are intangible and therefore very difficult to measure
Indicate whether the statement is true or false