Inyour own wod: 1. What is risk, what makes an investment risky and how can you

Question

Inyour own wod:

1. What is risk, what makes an investment risky and how can you measure risk?

2. How can increased risk impact the price of bonds?

3. If you are considering two investments of different size what would you use for your deciding factor on which to invest in and why?

4. In considering purchasing one of two common stocks would you want to see a beta of -1, 0 or +1 and why?

5. Give an example of two companies/industries that could be combined to reduce risk due to negative correlation.

Explanation / Answer

1. Risk is the uncertainty of something unexpected happening. Risk is deviation from the expected results resulting in the unexpected results. An Investment gets risky when there are higher chances of deviation from the expected results. The higher the chances the higher would be the risk. Risk can be measured by calculating the standard deviation of the Investment based on the historical results of the returns and variations.

2. The increased risk would increase the return demanded by the customers and hence the price of the bond would decrease. Since the risk is higher, the investors demand higher returns, and hence lower prices of bonds.

3. If the Investment are of different size, then the expected return and the risk or standard deviation is measured and used as the deciding factor for investing.

4. A beta of +1, is great since that would means aligning to the market return, which are generally diversified and hence less risky as compared to other while giving higher returns.

5. The two industry can be combined to reduce risk because of negative correlation are: Paper and Technology

Paper are being replaced by laptops, mobile etc. And hence they are negatively correlated.

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