Risk Relation

 

Write an assessment in which you address the following problems/questions:

Assess how diversification benefits the investor. Can you imagine circumstances where an investor would not want to diversify? Then explain why or why not.
Analyze the formulation of the Capital Asset Pricing Model, including the definition of the model with identification of each component. Explain how the CAPM development effectively makes use of the diversification as a foundation for the development of the model. Discuss the uses of the Capital Asset Pricing Model within finance.
Develop the Capital Asset Pricing Model using the assumptions that the risk-free rate is 3%, the expected return on the market is 8%, and the relevant beta is 1.05.
Use problem 3 to develop the alternative solutions presented within a table for the assumptions that the beta is 0.75, 1.05, and 1.75 as well as the assumption that the risk free rate is 1%, 3%, and 6.5%.
Develop a valuation model for a common stock assuming that a company just paid a dividend of $1.75 per share. It’s assumed that the dividend will grow at a constant rate of 6% per year forever. The risk-free rate is 6% with an expected return on the market of 12% and a beta of 1.1. Show each step in generating the resulting valuation.
Use your analysis of question 5 above to form a table that shows all combinations for the model with the growth rate at 2%, 6%, and 9% and the beta at 0.75, 1.1, and 1.8. Explain why your generated results make financial sense.

Sample Solution

Risk Relation

Diversification is a technique that reduces risk by allocating investments across various financial instruments, industries, and other categories. It aims to maximize returns by investing in different areas that would each react differently to the same event. Most investment professionals agree that, although it does not guarantee against loss, diversification is the most important component of reaching long-range financial goals while minimizing risk. Diversification can help an investor manage risk and reduce the volatility of an asset`s price movements. Professionals are always touting the importance of diversification but there are some downsides to this strategy. First, it may be somewhat cumbersome managing a diverse portfolio, especially if you have multiple holdings and investments.

t harder for people to survive off basic living needs, meaning more people are having to rely on food banks. The rollout of universal credit is also contributing to the large numbers of people having no choice but to turn to food banks. Universal credit has been put in place in the United Kingdom as a part of a social security payment scheme. This will affect the lives of those who are dependent on benefits; it will replace jobseeker’s allowance, housing benefits and so on. Approximately a fifty-two percent increase of food bank usage is due to the full rollout happening (Bulman, 2018). There is a significant amount of disabled people and those with mental health problems who are having to rely on food banks, this may be due to the fact their illness is seen as invisible and therefore not enough support is being provided for them. For example, benefit delays may impact them being able to actually afford to live or they may not even be getting the benefits they need and should be entitled to. Half of households that have referrals will include a person with a disability, and a third of households who have been refereed will include an individual suffering with a mental health condition (Morley, 2017). Overall, this suggests the government is not providing enough or the right amount of social protection for those suffering with a disability or mental illness.

In order to resolve this issue around the alarmingly high numbers of referrals to food banks, there must be improvements on benefit levels to align with inflation. This way, not as many people will feel the need to rely on food banks as cost of living will be more affordable. This will especially be the case for individuals suffering with disabilities and families with children who are highly reliant on food banks. Another thing is that local authorities should play a role in helping to tackle this issue; local authorities should provide a ‘Universal Support’ service. Improvements need to be made with administration with regards to Universal Credit in order to deal with errors that are taking place. This will help those who are claiming universal credit and are in desperate need of help. If this is not done it could play a huge role in ruining the lives of those in need help, such as disabled people and those with mental health problems. The future will mean that benefits are based on universal credit, which is why it is so important to ensure the cost of living assigns with inflation. To deal with this, costs of essentials should be made affordable to prevent more people from struggling. More than a third of parents, who are working full time, are earning less than the minimum wage, causing them to skip meals on a regular basis. To tackle this, businesses should play a role in helping those in need of help.

Businesses could provide more than just what the government is offering and commit to helping those in need (Bulman, 2018). For example, food wastage is getting worse in the United Kingdom; by the year 2030, the amount of food wasted in a year will increase by a third. 2.1 billion tonnes of food will be lost, thrown away, and so on, which is the same as sixty-six tonnes of food being thrown away each second (Ratcliffe, 2018). Therefore, if businesses even offered a bit of food to those in desperate need of food, food which they are just going to get rid of, then this will have a significant positive impact in the long run, especially if more and more businesses take part in this. Overall, this could play a vital in reducing the number of referrals that are made to foodbanks and will help contribute towards the bettering of society.

09.01.2019

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