Investment

Step 1: Solution for ‘a’

β = 0 implies E(r) = r_f, not zero.
Therefore the correct answer for option ‘a’ is False.

Step 2: Solution for ‘b’

Since Investors require a risk premium for bearing systematic risk (i.e., market or
Un-diversifiable) therefore the correct answer for option ‘b’ is False.

46.	Is the following true or false? Explain. You can construct a portfolio with a beta of .75 by investing .75 of the investment budget in T-bills and the remainder in the market portfolio. You should invest 0.75 of your portfolio in the market portfolio, and the remainder in T-bills. Then: βP = (0.75 x 1) + (0.25 x 0) = 0.75 Therefore the correct answer for option ‘c’ is False.
47.	What is the importance of diversification in investment?
48.	What is the difference in returns between dividend and growth options while selecting a mutual fund?
49.	What are the charges while investing in mutual funds?
50.	Define excess return and explain with an example.
51.	What is market risk? Explain. Market risk is the possibility that an individual or other entity will experience losses due to factors that affect the overall performance of investments in the financial markets. Market risk and specific risk (unsystematic) make up the two major categories of investment risk. Market risk, also called "systematic risk," cannot be eliminated through diversification, though it can be hedged in other ways. Sources of market risk include recessions, political turmoil, changes in interest rates, natural disasters, and terrorist attacks. Systematic, or market risk, tends to influence the entire market at the same time.2 This can be contrasted with unsystematic risk, which is unique to a specific company or industry. Also known as “nonsystematic risk,” "specific risk," "diversifiable risk" or "residual risk," in the context of an investment portfolio, unsystematic risk can be reduced through diversification.2
52.	Compare corporate bond market and stock market in terms of risk and return.
53.	Explain the notion of Sharpe ratio? Since arithmetic return ignores compounding, it is not likely to artificially inflate the annual performance of the portfolio. On the other hand, geometric return represents a compounding growth number and will artificially inflate the annual performance of the portfolio.
54.	How can risk aversion be measured The general level of risk aversion in the markets can be seen in two ways: by the risk premium assessed on assets above the risk-free level and by the actual pricing of risk-free assets, such as United States Treasury bonds. The stronger the demand for safe instruments, the larger the gap between the rate of return of risky versus non-risky instruments. Prices for Treasury bonds also increase during times of strong demand, pushing yields lower.? Bozorlarda tavakkalchilikdan voz kechishning umumiy darajasini ikki yo'l bilan ko'rish mumkin: risksiz darajadan yuqori bo'lgan aktivlar bo'yicha baholangan risk mukofoti va Amerika Qo'shma Shtatlari G'aznachilik obligatsiyalari kabi risksiz aktivlarning haqiqiy bahosi bilan. Xavfsiz vositalarga talab qanchalik kuchli bo'lsa, xavfli va xavfli bo'lmagan vositalarning daromadlilik darajasi o'rtasidagi farq shunchalik katta bo'ladi. G'aznachilik obligatsiyalari narxlari kuchli talab davrida ham oshib, daromadlilikni pasaytiradi.
55.	What is risk-free rate? Explain The risk-free rate of return is the interest rate an investor can expect to earn on an investment that carries zero risk. In practice, the risk-free rate is commonly considered to equal to the interest paid on a 3-month government Treasury bill, generally the safest investment an investor can make. The risk-free rate is a theoretical number since technically all investments carry some form of risk, as explained here. Nonetheless, it is common practice to refer to the T-bill rate as the risk-free rate. While it is possible for the government to default on its securities, the probability of this happening is very low. .
56.	Explain Value at risk(VaR) and give an example. Value at risk (VaR) is a statistic that quantifies the extent of possible financial losses within a firm, portfolio, or position over a specific time frame. This metric is most commonly used by investment and commercial banks to determine the extent and probabilities of potential losses in their institutional portfolios. Risk managers use VaR to measure and control the level of risk exposure. One can apply VaR calculations to specific positions or whole portfolios or use them to measure firm-wide risk exposure.
57.	What is scenario analysis approach Scenario analysis is the process of estimating the expected value of a portfolio after a given period of time, assuming specific changes in the values of the portfolio's securities or key factors take place, such as a change in the interest rate. Scenario analysis is commonly used to estimate changes to a portfolio's value in response to an unfavorable event and may be used to examine a theoretical worst-case scenario.
58.	What is Fisher equation and define it The Fisher equation is a concept in economics that describes the relationship between nominal and real interest rates under the effect of inflation. The equation states that the nominal interest rate is equal to the sum of the real interest rate plus inflation. The Fisher equation is often used in situations where investors or lenders ask for an additional reward to compensate for losses in purchasing power due to high inflation. Real interest rate+ inflation= nominal interest rate.
59.	Explain the relations between inflation and real interest rate. Interest rates tend to move in the same direction as inflation but with lags, because interest rates are the primary tool used by central banks to manage inflation. In the U.S, the Federal Reserve targets an average inflation rate of 2% over time by setting a range of its benchmark federal funds rate, the interbank rate on overnight deposits. In general, higher interest rates are a policy response to rising inflation. Conversely, when inflation is falling and economic growth slowing, central banks may lower interest rates to stimulate the economy. The Fed plans to continue raising interest rates in 2022 in order to curb the highest rates of inflation in 40 years.
60.	How is effective interest rate calculated and why it is important? Thus, the formula to calculate EAR (which we’ll refer to as i) looks like this: i = (1+r / m) x m −1 m is the months
61.	What are the main purposes of money markets? Why is there a need for money markets? money markets Include short-term, highly liquid, and relatively low-risk debt instruments.
62.	Why are T-Bills a favorable money market instrument for the U.S. government? For investors?