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Essay / Research Paper Abstract
This 3-page paper discusses topics such as investor risk, portfolio diversification and arbitrage pricing theory.
Page Count:
3 pages (~225 words per page)
File: AS43_MTquesrisk.doc
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Unformatted sample text from the term paper:
comes to investing. Two main risks in doing so, however, are the risk that the investor will never get back the money he invested (because of bankruptcy or a financial
institution collapse). The other type of risk involves value fluctuation; in other words, the fact that the investments values go up and down in a given period of time. Those
who invest in even so-called "blue chip" stocks (called such because the companies issuing the stocks are known for solid financials and longevity) will suffer from ups-and-downs when it comes
to the stock price. Technically, both these types of risks can be reduced through portfolio diversification, but its a lot harder to
reduce potential risk of a company going out of business, no matter how diverse the portfolio. If, however, the investors portfolio is highly diversified, it means that the value of
one investment or asset can help offset that of another, if the other will drop in value. If, for example, our investor buys stock in oil companies and assisted living
companies, if the value of the oil companies shares drops, the chances are pretty good that the stock in the assisted living companies will either remain steady or trend upward.
State the formula for the arbitrage pricing theory. What are the three steps involved in estimating expected returns using this formula? Arbitrage
pricing theory (ABT) points out that the anticipated return of a financial asset is considered as a linear function of market indices or macroeconomic factors. In other words, APT is
based on the assumption that a return on asset can be predicted by using the relationship between the asset and other common risk factors (such as macroeconomic factors). The APT
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