PPS College Finance Risks and Investments Discussion

The discussion on risk and return is very important for two reasons. First, risk is an extremely important consideration to management team in almost all business decisions, so you want to discuss just what risk is and how it is rewarded in the market. The second, is to learn what determines the appropriate discount rate for future cash flows generated from a corporation’s operation.

For your initial post in the discussion forum, be sure to address the following questions in detail with supporting examples:

1. We have seen that in the long run that stock investments tend to substantially outperform bond investments. However, it is not all uncommon to observe investors with long horizons holding only bonds. Are such investor irrational? Why or why not?
2. What are the implications of the efficient markets hypothesis for investors who buy and sell stocks in an attempt to “beat the market”?
3. In broad terms, why are some risks diversifiable? Why are some risks nondiversifiable? Does this mean that an investor can control the level of unsystematic risk in a portfolio, but not the level of systematic risk?
4. Please provide specific examples to support your arguments.