List several examples of alternative investments and why they carry more risk than more traditional kinds of investments.
What will be an ideal response?
There are many other alternative investment types available that have varying degrees of risk, reward and effort. These include annuities, precious metals, gems, collectibles, commodities, options and futures. These investment types are not common and therefore, come with more risk, as their markets are speculative in nature when compared to stock or bond markets. Unlike stocks and bonds, which are traded by the tens of millions each day by millions of different people, alternative investments tend to be traded by a smaller number of people, and therefore, the information is not as easily available. This does allow more room for reward, but also means that you will experience much more risk.
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Indicate whether the statement is true or false
Your friend is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. She is highly risk averse and has asked for your advice. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter?
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Indicate whether the statement is true or false