Chap 7: Risk and Return

Question 1

What is the definition of risk?

Answer 1

The chance that some unfavourable event will occur

Question 2

What are the classification of human being’s attitude towards risk?

Answer 2

1. Risk averse: tendency of a person reject a bargain with an uncertain payoff and accept another bargain with a more certain, but possible, a low expected payoff
2. Risk taker: willingness to take on additional risk for an investment that has a relatively low expected return
3. Risk neutral: the level of risks does not matter, as long as the return in commensurate

Question 3

What does it means by correlation?

Answer 3

• the tendency of two variables to move together
• measured by correlation coefficient

Question 4

What are the types of correlation?

Answer 4

1. Perfect positive correlation
2. Perfect negative correlation
3. Zero correlation/Independent