FIN-515- Managerial Finance Week 3_Risk Return and the CAPM _Discussion_Question_2_Answer

Apr 24th, 2015
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FIN-515- Managerial Finance Week 3_Risk Return and the CAPM _Discussion_Question_2_Answer

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Risk Return and the CAPM (graded) What is the relevant risk of a stock, and how is it measured? How is this information useful to an investor?Hello! Is beta an accurate measure of risk? Why or why not? I look forward to your replies!Is beta an accurate measure of risk? Why or why not? Beta is only a tool to assist you in your choice for investing and expectations for return. Like other variables the beta puts all bonds on the same measuring scale (big or small). Some pitfalls are that beta is calculated from historical information about the future. Beta also does not take under consideration future events. I equate it to the expiration date on milk. It is a prediction about how long it will last from past experience. So when you go to by milk, and the hopes is it will last for 2 weeks, you should take note of the predicted expiration date. That date does not mean that the milk will go bad on that day but it help make a choice, add value and confidence, and assess risk. From the side of the seller, milk that will go bad sooner will normally be marked down to ensure it is sold. By decreasing price increases value for the buyer. So if you needed milk to make a big meal then the extra value would draw the buyer to invest. I know this is a very rough example but it helped me. Beta is an accurate measure of risk because it measures how a stock affects the risk of a diversified portfolio. Diversifying a portfolio of stocks, in general, will reduce the risk of th

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