When using the binomial model, you can't make decisions about investment using only the risk-neutralmeasure becauseO all investments have the same expected rate of return in the risk-neutral measure.all investors are risk-neutral in the risk-neutral measure.all information about risk was removed from the model by switching from physical to risk-neutral measure.there are undue assumptions made in the construction of the risk-neutral measure.None of the other responses.

Risk-neutral probabilities are used to try to find an asset's or financial instrument's objective…

When using the binomial model, you can't make decisions about investment using only the risk-neutral measure because O all investments have the same expected rate of return in the risk-neutral measure. O all investors are risk-neutral in the risk-neutral measure. O all information about risk was removed from the model by switching from physical to risk-neutral measure. O there are undue assumptions made in the construction of the risk-neutral measure. O None of the other responses.

When using the binomial model, you can't make decisions about investment using only the risk-neutral measure because O all investments have the same expected rate of return in the risk-neutral measure. O all investors are risk-neutral in the risk-neutral measure. O all information about risk was removed from the model by switching from physical to risk-neutral measure. O there are undue assumptions made in the construction of the risk-neutral measure. O None of the other responses.

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Similar questions

A criticism of the CAPM is that it: А. utilizes too many factors. В. ignores the risk-free return C. ignores the return on the market portfolio. D. requires a single measure of systematic risk.
In choosing where to invest, return and risk for an investment must be compared. It is not sufficient to choose an investment based only on return without taking risk into consideration. There are two methods or measures that compare return and risk. State these two methods, the formula for each and the criteria used in evaluating alternative investment of each method.
If there is uncertainty about monetary outcome and you are concerned about return and risk, then all you need to know are the mean and standard deviation of the possible outcomes. The emtire distribution provides no extra useful information. Do you agree or disagree? Justofy your answer and provide an example to back up your argument.
Which of the following is NOT true? You might be better off using elimination approach for this question if your other courses (Financial Management, Investment/Portfolio Management) did not familiarize yourself with the concept of risk-neutrality. In risk-neutral valuation the risk-free rate is used to discount expected cash flows In risk-neutral valuation the expected return on all investment assets is set equal to the risk-free rate O Derivatives can be valued based on the assumption that investors are risk neutral O Risk-neutral valuation provides prices that are only correct in a world where investors are risk-neutral None of these (i.e. all are TRUE)
Risk is the potential for an investment to generate more than one return. A security that will produce only one known return is referred to as a risk-free asset, as there is no potential for deviation from the known expected outcome. Investments that have the chance of producing more than one possible outcome are called risky assets. Risk, or potential variability in an investment’s possible returns, occurs when there is uncertainty about an investment’s future outcome, such as the return expected to be generated by the investment and realized by an investor. You invest $100,000 in 40 stocks, 20 bonds, and a certificate of deposit (CD). What kind of risk will you primarily be exposed to? Stand-alone risk Portfolio risk Generally, investors would prefer to invest in assets that have: a high level of risk and low expected returns. a low level of risk and high expected returns.
Which of the following statements is TRUE about risk-free investment? a. Return in risk-free investment is high, but the investment manager charges a fee for the guarantee. b. It always provides inconsistent return as consistent return requires higher risk c. It provides lower returns as higher return requires higher risk.
In a few sentences, answer the following question as completely as you can. We routinely assume that investors are “risk-averse return-seekers” (i.e., they like returns and dislike risk). If so, why do we contend that only systematic risk is important? Alternatively, why is total risk, on its own, not important to investors?
The empirical SML is too flat relative to what CAPM predicts. Researchers have focused on which two possible explanations?. I - Leverage aversion II - Lottery preference III - Myopic loss aversion IV - Risk aversion A. I and II B. I and III C. I and IV D. II and III E. II and IV
By choosing assets that do not exhibit a high positive covariance with each other, the systematic risk be partially eliminated? a.false b.true
List which of the following statement(s) concerning risk are correct? 1. Nondiversifiable risk is measured by beta. II. The risk premium increases as diversifiable risk increases. III. Systematic risk is another name for nondiversifiable risk. IV. Diversifiable risks are market risks you cannot avoid.
A borrower who takes out a loan usually has better information about the potential returns and risks of the investment projects he plans to undertake than the lender does. This inequality of information is called O a. adverse selection. b. moral hazard. C. asymmetric information. O d. noncollateralized risk.
Does a greater risk imply a bad investment? Give me some example.

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