Westminster International University in Tashkent Corporate Finance 4econ009C-n 2021/2012, Semester 2

Westminster International University in Tashkent

Corporate Finance 4ECON009C-n 2021/2012, Semester 2

Tutorial 6. Risk and Return I

1. 
   What is meant by investor’s required rate of return? How do we measure the riskiness of an asset? How should the proposed measurement of risk be interpreted?
   

1. 
   The investor's required rate of return is the minimum rate of return necessary to attract an investor to purchase or hold a security.
   
2. 
   Risk is the potential variability in returns on an investment. Thus, the greater the uncertainty as to the exact outcome, the greater is the risk. Risk may be measured in terms of the standard deviation or by the variance term, which is simply the standard deviation squared.
   
3. 
   A large standard deviation of the returns indicates greater riskiness associated with an investment. However, whether the standard deviation is large relative to the returns has to be examined with respect to other investment opportunities. Alternatively, probability analysis is a meaningful approach to capture greater understanding of the significance of a standard deviation figure. However, we have chosen not to incorporate such an analysis into our explanation of the valuation process.
   

2. 
   What is (a) unsystematic risk (company-unique or diversifiable risk) and (b) systematic risk (market or nondiversifiable risk)?
   

1. 
   Unique risk is the variability in a firm's stock price that is associated with the specific firm and not the result of some broader influence. An employee strike is an example of a company-unique influence.
   
2. 
   Systematic risk is the variability in a firm's stock price that is the result of general influences within the industry or resulting from overall market or economic influences. A general change in interest rates charged by banks is an example of systematic risk.
   

3. 
   What are the main categories of investors in terms of risk taking behavior?
   

Risk plays an important role in affecting the decision making of the investor. It affects different types of investors in different ways. Some investors like risk taking and some avoid to take risks. Following are the most important types of investors according to their risk taking behaviors.

1.