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In theory, only systematic risk matters for the required return of a stock. Why does non-systematic risk not matter?
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- What is the difference between a diversifiable riskand a nondiversifiable risk? Should stock portfoliomanagers try to eliminate both types of risk?Why doesn’t a volatile stock price necessarily imply irrationalpricing?Why is it reasonable to ignore diversifiable risk and care only about nondiversififiable risk? What about an investor who puts all of his money into only a single risky stock? Can he properly ignore diversififiable risk?
- What is risk aversion, and how is risk aversion related to the expected return on a stock?Why might the stock price changing make sense within the context of risk and return?State whether the following statement is True or False and explain why. “The return on a risk-free asset and the return on any common stock are perfectly negatively correlated.”
- Is it reasonable to ignore IDIOSYNCRATIC RISK and care only about MARKET (SYSTEMIC) risk? What about investors who put all their money into only a single risky stock...is that prudent and can they ignore idiosyncratic risk?How can you evaluate if stocks are underperforming?Can the goal of maximizing the value of the stock conflict with other goals, such as avoiding unethical or illegal behavior?