Investments are based on the belief that the rate of return justifies or compensates the investor for the risk associated with that particular investment. The risk associated with this investment is associated with the chance that a loss will be incurred. Or, to put it another way, the greater the chance of a loss the more risky the investment. Therefore, some statistical measures of the risk involved with an investment are necessary before the investment is made.
Address all of the following questions in a brief but thorough manner. What is the Expected Rate of Return on an investment and what does it tell us about the probability of the risk involved with a particular investment? How could the required rate of return of an investment be estimated? In terms of risk, what are the advantages (and/or disadvantages) of a well-diversified portfolio?
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