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Chapter 4: Q2DQ (page 436)

Discuss the concept of risk and how it might be measured.

Short Answer

Expert verified

The risk is a variability of outcomes from an investment and it can be measured using coefficient variations.

Step by step solution

01

Concept of risk

Risk is defined in the terms of variability of the outcomes or results from a given investment’s choices. When the variability is high risk is also high.

02

Measurement of risk

Risk is measured using the coefficient variation, in which the standard deviation is divided by the mean. Risk can also be measured in terms of beta, in which the volatility of returns on a particular individual stock is determined in relation to the stock market index.

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