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businessfinancefinance questions and answers9. an investor needs a financial incentive to take a risk. the expected return on a risky investment (r) must exceed the return on a risk-free investment (rf). in practice, the risk-free return is often taken to be the rate of interest on short-term u.s. government debt. the expected excess return on a risky investment is given by r−rf. according to the
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Question: 9. An Investor Needs A Financial Incentive To Take A Risk. The Expected Return On A Risky Investment (R) Must Exceed The Return On A Risk-Free Investment (Rf). In Practice, The Risk-Free Return Is Often Taken To Be The Rate Of Interest On Short-Term U.S. Government Debt. The Expected Excess Return On A Risky Investment Is Given By R−Rf. According To The
9. An investor needs a financial incentive to take a risk. The expected return on a risky investment \( (R) \) must exceed th
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9. An investor needs a financial incentive to take a risk. The expected return on a risky investment (R) must exceed the return on a risk-free investment (R f
​
). In practice, the risk-free return is often taken to be the rate of interest on short-term U.S. government debt. The expected excess return on a risky investment is given by R−R f
​
. According to the capital asset pricing model (CAPM), the expected excess return on an asset is proportional to the expected excess return on a portfolio of all available assets (market portfolio). This model is given below: R−R f
​
=β(R m
​
−R f
​
)+u where R m
​
is the expected return on the market portfolio. a. Suppose β>1. Compare the return on R with the market portfolio. Explain. b. Suppose β>1. Show that Var(R−R f
​
)>Var(R m
​
−R f
​
). c. Suppose β<1. Compare the return on R with the market portfolio. Explain. d. Suppose β<1. Is it possible that Var(R−R f
​
)>Var(R m
​
−R f
​
) ?