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

Risk Neutral

Risk neutral is a type of investor who is not entirely concerned with the risk or rate or return on his/her investment.

2. 
   Risk taker
   

Risk taker or risk lover is a type of investor who is only concerned about the rates of return on the investments. He/she is never afraid of taking risks while investing in stock or commodities. He/she is always ready to take high risks to earn high rates of returns on his/her investments. Risk taker investor has a very high tolerance for the risk. He/she also has a very strong desire of earning high rate of return on investments.

3. 
   Risk Averse
   

Risk averse is a type of investor who always selects the investment with low risk. This type of investor is always concerned with the amount of risk rather than the rate of return on the investment. A risk averse investor avoids adding high risk securities in his/her portfolio.

4. 
   What is the meaning of beta? How is it used to calculate k, the investor’s required rate of return?
   

Beta indicates the responsiveness of a security's returns to changes in the market returns. Beta is multiplied by the market risk premium and added to the risk-free rate of return to calculate a required rate of return.

5. 
   Suppose you are buying a stock of Apple for $130. It is going to pay you a dividend of $3. After one year you sell your stock for $150. What is the return on this stock?
   

R= =0.18 or 18%

6. 
   Your friend James, an amateur investment analyst has been observing some corporate bonds market in recent years and noticed the following: when the economy is booming, the bonds are returning 2%; when steady returning 5% and when recession returning 10%. James also has calculated the probabilities of these economic states to happen as below:
   

Economic state	Probability of econ. state Px	Return in econ. state Rx	Expected return for each econ. state	Variance of returns for each econ. state ^2
			(Px)(Rx)	(Rx - )^2 (Px)
Boom	25%	2%	0.50%	0.000264
Steady	55%	5%	2.75%	0.000003
Recession	20%	10%	2.00%	0.000451
E(R) for corporate bonds
Std. dev. of E(R)	or 2.68%