3.1: prefer investment A, because of the possibility of a high payoff
Given that they have the same expected return and standard deviation, I would choose the investment with a likelihood (albeit small) that I will quadruple my money.
3.2: No.
I would view the invetment that went down as more risky. It is downside
risk that I would be concerned about. We do not differentiate between
the two in finance because we assume that distributions are symmetric
- upside and downside are matched up.
3.3: Generally True.
The owners of privately owned firms are not well diversified. Hence, they tend to be concerned about all risk (rather than just market risk) and demand higher discount rates to cover the risk.
It does provide a rationale for the acquisition of private businesses by
publicly traded firms, since the latter will see less risk, attach lower
discount rates and higher values to the same businesses than private owners.
3.4: False
A well-managed firm will earn higher returns, but market risk cannot be altered by the quality of management.
3.5: Borrow money and buy a well-diversified portfolio
The most efficient way to take risk in the CAPM portfolio is to stay
diversified and use leverage to increase risk.
3.6: All of the above
Negative beta firms reduce the risk of a well-diversified portfolio against
some market risk. They will have expected returns that are lower than
the riskless rate, and are thus not appropriate as stand-alone investments.