RISK AND RATES OF RETURN (I need help explaining the following and/or demonstrat

Question

RISK AND RATES OF RETURN

(I need help explaining the following and/or demonstrating it for my upcoming exam if anyone could help me comprehend the concepts I would greatly appreciate it!!)

Explain the positive relationship between risk and return..

Interpret standard deviation and probability distributions as a measure of risk..

Explain diversifiable (business-specific or unsystematic) risk versus non-diversifiable (systematic) risk..

Interpret correlations between investments and explain how basic diversification works..

Explain and interpret beta () for an individual security and for a portfolio..

Calculate portfolio beta () given the betas and weightings of individual securities..

Calculate expected return, E(r), for a stock using the CAPM formula..

Calculate portfolio expected return given the returns and weightings of individual securities..

Relate the CAPM formula to the Security Market Line (SML) and explain what the SML shows..

Explain how inflation affects the SML..

Explain how changes in investor risk aversion (MRP) affects the SML..

Explanation / Answer

Explain the positive relationship between risk and return..

Answer: The relationship between risk and return is positive. It means if risk is higher than return is also higher and vice versa.

Interpret standard deviation and probability distributions as a measure of risk..

Answer: The smaller the standard deviation, the tighter the probability distribution, and, accordingly, the lower the riskiness of the stock. Standard deviation is an absolute measure of stand-alone risk.

Explain diversifiable (business-specific or unsystematic) risk versus non-diversifiable (systematic) risk..

Answer:Unsystematic risk, also known as "specific risk," "diversifiable risk" or "residual risk," is the type of uncertainty that comes with the company or industry you invest in. Unsystematic risk can be reduced through diversification. Systematic risk, also known as "market risk" or "un-diversifiable risk", is the uncertainty inherent to the entire market or entire market segment. Also referred to as volatility, systematic risk consists of the day-to-day fluctuations in a stock's price.

Interpret correlations between investments and explain how basic diversification works..

Answer: if correlation is negative than investment is not preferrable and posive than it is recommended.

Explain and interpret beta () for an individual security and for a portfolio..

Answer: Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. Beta is used in the capital asset pricing model (CAPM), a model that calculates the expected return of an asset based on its beta and expected market returns.

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