Running head: UNDERSTANDING THE CONCEPTS
Understanding the Concepts
Professor John Underwood
May 27, 2012
Identify the components of a stock’s realized return. A realized return is the amount of actual gain that is made on the value of a portfolio over a specific evaluation period. The components of a stock are realized return is dividends, distributions, and share price appreciation. Dividends play a very important role in stock realized dividends may be in the form of cash, stock or property. Most secure and stable companies offer dividends to their stockholders. High growth companies will not likely offer dividends, because ...view middle of the document...
Systematic risk is not in the control of investors and cannot be mitigated largely. In contrast to this, the unsystematic risk can be mitigated through portfolio diversification. This is a risk that cannot be avoided and the market does not compensate for taking this risk (Takaiski, 2010).
Explain why the total risk of a portfolio is not simply equal to the weighted average of the risk of the securities in the portfolio. The reason for this is that the portfolio is always diversified. Diversification reduces the total risk if the portfolio. Not all risks can be diversified away. All securities, bonds, stocks have it and equal systematic risk as the factor affecting them are same as general market, economic rates and so on. This risk cannot be eliminated. Investors can construct a diversified portfolio and eliminate a part of this systematic risk. However, more the securities are added, more the unsystematic risk drops until the total risk value approaches its systematic risk. Inability of diversification, not being completely able to eliminate market risk, causes the total risk of portfolio not being equal to the weighted average risk of the securities of the portfolio.
State what beta measure and its uses. Beta measures are a measure of volatility, or systematic risk of a security or a portfolio in comparison to the market as a whole. Beta measure is use in the capital asset pricing model. Beta is calculated using regression analysis...