SUMMARY6
risk without necessarily reducing the potential return
List four different types of risk.
Describe the expected, and required returns.
Explain the difference between the following risks: geographic risk, economic risk, cultural risk, and political risk.
Briefly describe risks you have observed throughout your daily life.
Differentiate the standard deviation and the beta coefficient as measures of risk.
Explain why larger standard deviations indicate increased risk.
Explain why higher beta coefficients indicate increased risk.
How is the required return calculated using the capital asset pricing model (CAMP)?
Illustrate the relationship between beta coefficient and the required return.
10. Describe a situation in which a company might use each of the following methods:
Why might an investor wish to invest in two uncorrelated industries?
What are the four most commonly used risk management methods?
You are considering purchasing Stock A. What is your expected return
Two stocks, A and B, have beta coefficients of 0.8 and 1.4, respectively.
What is the expected return of Stock A, assuming that it has a beta coefficient of 0.57, a risk free investment yields 2.3% and the expected return on the market is 8.1%?
What is the expected return on an investment with a beta coefficient of 1.3 if the risk-free rate is 2% and the return on the market is 8.1%? If the required return on the investment is 11.2%
Choose the correct answer.
The risk-adjusted required rate of return excludes:
Match the terms listed with their definitions. Write the letters of the correct definitions.
Natural risks
Weighted Average Return = (probability of event 1 x return on event 1)
Investment Decisions
List the types of systemic risks Amina may be identifying.
Which methods can Amina use to evaluate and readjust her investment portfolio?
Use the risks you identified to recommend which financial tools Amina should be using. Justify your response.
Risk Management and Insurance
Explain how Sahar and her business partners might use risk avoidance, risk reduction, risk transfer, and risk assumption to create a risk management plan for their company.
Recommend various types of insurance the company might consider to protect itself.
Capital Asset Pricing Model (CAPM)
Explain possible risks a commodity company might encounter to use the capital asset pricing model (CAPM) to determine the risk premium.
Using the CAPM formula, calculate the risk premium for the following situation:
CASE STUDY: INVESTMENT CONSULTING
Fatima replies, “I think we need to look at the current beta coefficient
To help Khalid and Fatima inform young Saudi professionals about their project in an educational program, create a list of uncontrollable risks that could influence business performance.
Khalid and Fatima need to explain financial risk beta coefficients to young Saudi professionals. Write a short explanation of beta coefficients, how these are determined and how they should b
Khalid and Fatima are concerned that young Saudi professionals may not see a reason to invest for retirement. Write an explanation of how investing for retirement should fit into a risk manag
Research Saudi banks that are offering retiree personal finance plans.
