Understanding the concepts of realized return of the stock, systematic Assignment

Understanding the concepts of realized return of the stock, systematic and unsystematic risk, risk of the portfolio, beta, WACC - Assignment Example Thus the total realized value of the stock is the summation of the realized value of the different assets. Segregating the different factors or components of a stock’s realized return it can be seen that such return is constituted essentially by three main blocks. The first factor reflects the total return that is expected of the stock. Second factor hints on the different economic changes that are taking place in the external world and the effect of such changes on the position of the stock. The third factor endeavors to figure out alterations in the external climate, which tend to render some unique effects on the firm’s stock position. Understanding of the components of realized return of a stock is essential for different stocks tend to reflect different types of sensitivity depending on the various factors. Further through the understanding of the firm’s stock position it becomes easy to infer on the stability position of the firm. (Brigham & Daves, 2009, p. 97; What is a Realized Return?, n.d.). Q.2. Contrast systematic and unsystematic risk A.2. The concept of systematic risks hints at the evolution of risks, which happen not by the occurrence of chance events. These risks rather happen due to the simultaneous occurrence of events, which do not rely on chances. Thus systematic risks are generally undiversified in nature. They can be easily correlated to the occurrence of certain external events. Examples of systematic risks entail changes in the state of economic conditions, which brings in abrupt losses for the economy as a whole. Hence a tight regulation brought about by the monetary organizations causes the rise in the rates of interest for financial concerns. However because of the correlated happenings of these risks due to changes in the economic conditions these risks become simultaneous in nature. Thus it becomes difficult to render insurance schemes covering such risks for these risks go on occurring spontaneously with economic changes. On the other hand the happen ing of unsystematic risks is related to the occurrence of events, which generally take place owing to chance factors. Risks emanating out of chance events cannot be correlated to the occurrences of the events, which are probable, by nature. For example the outbreak of fire in a complex is simply a probabilistic event and depends highly on chance factors. Thus any amount of expected economic loss amounting from such counters an unsystematic risk and can be insured beforehand (Condamin, Louisot, & Naim, p.4). Further the due to certainty measures the amount of systematic risks can be rendered for explanations and also can be easily modeled. On the contrary, the unsystematic risks for the uncertainty factor adhered to it fails to be modeled. (Los, 2001, p.114) Q.3. Explain why the total risk of a portfolio is not simply equal to the weighted average of the risks of the securities in the portfolio. A.3. The total risk of a portfolio is computed based on the variance or standard deviatio n of the different returns emanating out of the different assets of the portfolio. However the variance computed does not depend on the weighted average of the different range of returns amounting from the employment of different assets. Rather the computation of the total risk of the portfolio is done based on the factor of correlation of each asset to other assets employed such. Thus if two assets constitute a certain portfolio then the