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1. Define the following and give an example:
Risk -
Return -
Risk Preferences -

2. What are the procedures for assessing and measuring the risk of a single asset?

When would you do this?

3. How do you measure the return and standard deviation for a portfolio?

Would you do this, or have your investment house provide it to you?

4. What is the concept of correlation?

How is it used in finance?

5. Explain in terms of correlation and diversification the risk and return characteristics of a portfolio.

Who would need to know this information?

Solution Preview

The response address the queries posted in 1336 words with references.

// In this paper, we have discussed about the various 'Concepts of Finance' that covers definition of risk, return, risk preferences, co-relation and diversification of risk. First of all, we will discuss about risk, return and risk preferences. //

1. Risk - Risk is a concept that denotes the precise probability of specific eventualities. It means that the width of a probability distribution of rate of return is a measure of risk. Risk also refers to variability. It is measured in financial analysis, generally by standard deviation or by beta coefficient. Risk arises due to the uncertain returns. For example: Business risk, Liquidity risk (Hull, 2007).

Return - Return is defined as the motivating force, inspiring the investor in the form of rewards and for undertaking the investment. Return is the actual income received including any change in market price of an asset or investment. For example: Expected return (Hull, 2007).

Risk Preferences - Risk preference is the term used to an investor, who needs certain amount with the zero level of risk. In this situation, risk premium or expected return is too low or equal to zero. For example: Certainty equivalent is equal to $50 and expected value is $ 30, in this situation certainty equivalent is higher than expected return, it means that there is no additional expected return or premium to the investors.

//After defining the terms we will now see, what are the various ' Procedures used for Measuring and Assessing the Risk of a Single Asset' and how these procedures can be used at the time of purchasing and investing in assets.//

2. The various procedures are used for assessing and measuring the risk of a single asset are probability distribution, sensitivity analysis, coefficient of variation, expected return and standard deviation.

Probability distribution: This procedure denotes the percentage chance of its outcomes. This method of assessing and measuring risk provides further insight into risk by anticipating a range of possible consequences and assigning to them different probabilities. With this procedure one can easily assess ...

Solution Summary

The response address the queries posted in 1336 words with references.