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How is diversification related to risk and return?
Diversification is related to risk and return because it involves spreading investments across different assets to reduce risk. By diversifying, investors can potentially lower the overall risk of their portfolio while still aiming for a competitive return. This strategy helps to minimize the impact of any single investment performing poorly, thus balancing the trade-off between risk and return.
What is Four principles of finance?
1. Money has a Time Value 2. There is a Risk-return trade off 3. Cash flows are the Source of Value 4. Market Prices reflect Information
The difference between returns on shares and government bonds is known as?
The difference between returns on shares and government bonds is known as the equity risk premium. This premium represents the additional return investors expect to earn from investing in stocks over safer government bonds, compensating them for the higher risk associated with equities. It is a key concept in finance, reflecting the trade-off between risk and return in investment choices.
How are the concepts of the risk-return trade-off risk pooling and the work of actuaries a foundation for the logic of insurance as well as the premium you will ultimately pay?
The risk-return trade-off highlights that higher potential returns come with increased risk, which is foundational in insurance as policyholders pay premiums to transfer their individual risks to the insurer. Risk pooling allows insurers to aggregate many individuals' risks, spreading the financial burden of losses across a larger group. Actuaries assess these risks and calculate appropriate premiums based on statistical data, ensuring that the premiums reflect the expected costs of claims while maintaining the insurer's profitability. Together, these concepts create a system where individuals can manage their risks effectively while contributing to a collective safety net.
What is the fundamental principle of financial leverage?
The fundamental principle of financial leverage is the use of borrowed funds to increase the potential return on investment. By utilizing debt, a company can amplify its profits when the return on investment exceeds the cost of borrowing. However, while leverage can enhance gains, it also increases risk, as losses can be magnified if the investment does not perform as expected. Thus, financial leverage involves a trade-off between potential reward and risk.
What does the risk-return trade-off mean?
In trading and investing, the risk is almost always higher if the return is expected to be greater.The risk-return trade off refers to the direct correlation between risk and return. An investor putting funds into a very low risk investment such as short term government bonds does not expect to incur a loss but will also have no opportunity for a high rate of return. Investing in higher risk ventures such as start up companies, initial public offerings, or common stock can result in significant loss but also offers the potential for out sized returns. Most investors understand that the higher the risk, the higher the potential returns.
What are the two key ideas of modern portfolio theory?
The two key ideas of modern portfolio theory are diversification and the trade-off between risk and return. Diversification involves spreading investments across different assets to reduce risk, while the risk-return trade-off suggests that investors should seek an optimal balance between risk and potential return based on their risk tolerance.
The basic trade-off in the investment process?
The basic trade- off in the investment process is between the anticipated rate of return for a given investment instrument and its degree of risk.
How is diversification related to risk and return?
Diversification is related to risk and return because it involves spreading investments across different assets to reduce risk. By diversifying, investors can potentially lower the overall risk of their portfolio while still aiming for a competitive return. This strategy helps to minimize the impact of any single investment performing poorly, thus balancing the trade-off between risk and return.
The trade off between profitability and risk is?
trade off between ris and profitability
What does high CAPM mean?
A high Capital Asset Pricing Model (CAPM) value indicates that an investment is expected to provide a higher return relative to its risk compared to the market. This is reflected in a higher beta, which signifies greater volatility and potential return. Investors may view high CAPM values as a sign of attractive investment opportunities, but they also entail greater risk. Overall, it emphasizes the trade-off between risk and expected return in financial decision-making.
How do financial decision involve risk return trade off?
The principle that potential return rises with an increase in risk. Low levels of uncertainty (low risk) are associated with low potential returns, whereas high levels of uncertainty (high risk) are associated with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if it is subject to the possibility of being lost.-- Raju R akki
What is a risk you accept in order to gain a benefit?
Trade-off
What is Four principles of finance?
1. Money has a Time Value 2. There is a Risk-return trade off 3. Cash flows are the Source of Value 4. Market Prices reflect Information
What is a trade off in?
A trade off usually refers to losing one quality or aspect of something in return of gaining another quality or aspect.
What is capital allocation line?
The capital allocation line (CAL) represents the risk-return trade-off of a portfolio that combines a risk-free asset and a risky asset or portfolio of assets. It is a graphical line that shows the expected return of a portfolio against its risk, measured by standard deviation. The slope of the CAL indicates the risk premium per unit of risk, helping investors determine the optimal mix of risk-free and risky investments to achieve their desired return. The point where the CAL is tangent to the efficient frontier represents the optimal risky portfolio.
What is a trade off in economics?
A trade off usually refers to losing one quality or aspect of something in return of gaining another quality or aspect.
