Answer: Investment risk is broadly categorized into two main types: systematic risk and non-systematic risk. Understanding this distinction is fundamental in security analysis and portfolio management, as it dictates the strategies investors employ to manage risk in their portfolios. **Systematic Risk (Non-Diversifiable Risk)** Systematic risk, also known as market risk or un-diversifiable risk, refers to the risk inherent to the entire market or market segment. It is caused by factors that affect th...

Answer: The capital market is a fundamental component of the financial system, playing a crucial role in economic growth by facilitating the raising of long-term capital for businesses, governments, and other entities. It acts as a platform for the exchange of long-term debt and equity instruments, effectively mobilizing savings for productive investments. This market comprises two main segments: the primary market and the secondary market. The primary market is where new securities are issued for the...

Answer: The Efficient Market Hypothesis (EMH), primarily attributed to Eugene Fama, posits that financial asset prices fully reflect all available information. In an efficient market, it is impossible for investors to consistently earn abnormal returns, meaning returns greater than those justified by the risk taken, by using information that is already reflected in the prices. This hypothesis suggests that competition among investors ensures that new information is quickly and unbiasedly incorporated i...

Answer: A portfolio, in the context of investment, refers to a collection or grouping of diverse financial assets held by an individual or an institutional investor. These assets typically include stocks, bonds, mutual funds, real estate, commodities, and other investment vehicles. The primary purpose of constructing a portfolio is to achieve specific investment objectives, such as capital appreciation, income generation, or wealth preservation, while managing and diversifying investment risk. The sele...

Answer: The Capital Asset Pricing Model (CAPM) and Arbitrage Pricing Theory (APT) are fundamental models in finance used to determine the expected return on a risky asset or portfolio. Both aim to quantify the relationship between risk and return, but they differ significantly in their underlying assumptions, complexity, and the number of risk factors considered. **Capital Asset Pricing Model (CAPM)** As discussed in the MS-44 course material, the CAPM is a single-factor linear model developed by Shar...