Investor’s required rate of return
Discuss investor’s required rate of return, and how the riskiness of an asset is measured and interpreted. Assess how diversifying investments would affect the riskiness and expected rate of return of a portfolio or combination of assets. Discuss unsystematic risk, systematic risk, characteristic line, beta, portfolio beta, and asset allocation.
The required rate of return refers the amount that is required to be earned by an investment to persuade people and companies to put money into the investment. “An investor’s required rate of return can be defined as the minimum rate of return necessary to attract an investor to purchase or hold a security”(Keown, Martin, Petty, 2013). Any investment can be a risky investment. Risk can be measured by the historical past of the company or person. Many stock have a Modern Portfolio Theory. This portfolio identifies the performance of the stock through a period of time. Diversifying the risk refers to investing in multiple stocks instead of just one. This lowers the risk since all of the investment is not in one place. Therefore, if one stock fails and another jumps up the consumer is still at the same level. This can be done with many different companies to spread out and lower the amount of risk the investor is taking.
The unsystematic risk refers to the risk that is related to the return which can be lowered by diversification. A systematic risk refers to the risk that is still related to the return but cannot be lowered by diversification. The characteristic line refers to the common behavior of a companies stock, the slope of this line is referred to as Beta. The asset allocation refers to selecting an asset class that best fits the investment. The portfolio beta is the differences between the return of the market and the return of the portfolio.