Question

Need help on the questions below, please?:( 1-Indicate how the SML resolved the tradeoff between risk and return. 2- How doe we measure risk for a stock? How do we know the risk of a bond? See this post in context

Answer 1

Answer(2): Risk of a stock and portfolio

Alpha- It is a measurement of risk relative to the market or a particular benchmark index.

Beta- We can measure risk for a stock by Beta factor. Beta is a measurement of risk pertaining to particular stock. It is a measure of volatility and systematic risk. Systematic risk is the overall market risk. Beta calculates how much a security is sensitive relative to the stock market. If security has beta 1, it means if market moves 5%, security will also move 5%.

VAR- It is the measurement of risk of a company' or portfolio. It is a statistical measure of financial risk of a company.

Risk of a bond-

Interest rate- Interest rates associated with bonds, fluctuate over a period of time. There is inverse relationship between price of bond and interest rate.

Credit rating risk- Credit rating agencies provide credit rating to the bonds based on their creditworthiness. AAA+, AAA-, AAA, AA are considered good ratings for bonds while C rating is not good and D is default.

Default risk- Some bonds may default and may not repay the principal amount of bond.