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BAUTISTA BAFIMARX ACT181, Activity 2

1) The document discusses different types of investors - risk averse, risk neutral, and risk seeking - and how financial managers should take a conservative approach to maximize returns while managing risk. 2) It also explains the coefficient of variation, which measures risk per unit of return and is useful for comparing investments with different expected returns. Investments with higher CVs indicate more volatile returns. 3) Additionally, the document notes that examining asset correlations is important for portfolio diversification and mitigating risk, as negatively correlated assets provide stability. 4) Finally, it defines systematic or market risk as external risks like wars or pandemics that cannot be diversified away, making them the most significant risks to consider

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135 views

BAUTISTA BAFIMARX ACT181, Activity 2

1) The document discusses different types of investors - risk averse, risk neutral, and risk seeking - and how financial managers should take a conservative approach to maximize returns while managing risk. 2) It also explains the coefficient of variation, which measures risk per unit of return and is useful for comparing investments with different expected returns. Investments with higher CVs indicate more volatile returns. 3) Additionally, the document notes that examining asset correlations is important for portfolio diversification and mitigating risk, as negatively correlated assets provide stability. 4) Finally, it defines systematic or market risk as external risks like wars or pandemics that cannot be diversified away, making them the most significant risks to consider

Uploaded by

Joshua Bautista
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Bautista Joshua

ACT 181
BAFINMARX – Financial Markets
August 29, 2020

Essay

a. As discussed in the previous lesson, investors demand returns from their investments as they
assume the risk of lending money to borrowers. In the discussion, investors are classified into 3
broad categories according to their preference of risk. First, risk averse individuals are those
who demand higher returns from investments with higher risk. Second, risk neutral individuals
are those who only account for the returns in their investments regardless of the investment’s
risk. Lastly, risk seeking investors are those who prefer to invest in higher risk securities who are
exposed to large probabilities of either losing or gaining more from their investments. Basically,
financial managers would take the rationality of risk adverse individuals. As such, financial
managers should construe their thinking on maximizing returns for their investments yet being
conservative as to the risk in different investing options.
b. The coefficient of variation is a measurement of risk per unit of return. It is a relative measure of
any risks associated with different returns on investments. Basically, the higher the coefficient of
variation the more volatile and the riskier an investment is. As it is relative to the expected
returns, it distinguishes the risk for two or more investments having different expected returns
as compared to the standard deviation. In as much to that, there can be instances where the
standard deviation for a given project would be smaller but will show a larger coefficient of
variation. It may prove that even a probable higher return on investment may be susceptible to
risk of having really low returns on the basis of the CV. This measure is better on comparing
investments with different expected returns because it accounts for the risk of the investment
aside from the expected return.
c. Examining correlation between assets is important because it can provide diversification for a
portfolio of assets. A diversified portfolio eliminates stand-alone risk for assets. For an instance,
a perfectly negative correlated assets can provide a more stable return in case of different
market conditions as contrasted with a perfectly positive correlated portfolio (which does not
eliminate the stand-alone risk). With the study of assets’ correlation, a portfolio can mitigate
diversification risks and provide a stable return for investments in case of unanticipated events
in the market.
d. Systematic risk would usually involve inherent market risk which cannot be eliminated by
diversification. In a more specific sense, a market risk is something that participants cannot
control and fully eliminate because they can be driven by external forces like war, famine, or a
pandemic. In the financial management sense, these risks are the only significant risks because
on the other hand, diversification risk can be easily eliminated by investing in multiple securities.

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Problems

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