When considering stand-alone risk, the return distribution of a less risky inves

Question

When considering stand-alone risk, the return distribution of a less risky investment is more placed ("tighter") than that of a riskier investment. What shape would the return distribution have for an investment with (a) completely certain returns and (b) completely uncertain returns? When considering stand-alone risk, the return distribution of a less risky investment is more placed ("tighter") than that of a riskier investment. What shape would the return distribution have for an investment with (a) completely certain returns and (b) completely uncertain returns?

Explanation / Answer

While considering the stand alone risk, the return distribution of a less risky investment is more placed than that of a riskier investment.

Stand alone Risk:

Standalone risk is the risk associated with a single operating unit of a company. Standalone involves the risks created by the operating unit and it will not exist if operations in that area were to cease.

Investor attitude towards Risk:

Risk aversion – assumes investors dislike risk and require higher rates of return to encourage them to hold riskier securities.

Risk premium – the difference between the return on a risky asset and a riskless asset, which serves as compensation for investors to hold riskier securities.

So the return distribution for an investment with completely certain returns is alwasysa bell shaped curve, in case of completely uncertain returns, the return distrubution varies in accordance with the risk means high rsk rresultsrb in high volataility and higher returns, lower risk results in lower volatality and lower returns. So it represents a positively skewed distribution.

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