Finance - Definition, Types, Theories and Implications of CAPM

Running head: FINANCE
Finance
Student
Institute
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Running head: FINANCE
Finance
Definition
Finance is the term, used to describe the study and system of money, investments and other
financial instruments including tax, government expenditures, debt issues. The finance is divided
into various types like, personal finance, corporate finance, public finance and social finance.
The main finances available for companies are debt and equity. There are numerous finance
theories, that explains the role of finance in the markets by various economists. It includes the
concept of raising and allocating money for different set of works. It is also used for managing
and controlling the asset and project details. There exist a lot of branches in finance sector, such
as rational choice theory, arbitrage pricing theory, prospect theory, legal origin theory, binomial
options pricing model and so on. Hence this finance system is a huge network sector that has
many branches on it. All the surrounding nations will have this concept that contain all the risk
divisions and the financial strategy of a nation is based on the following concepts.
Computer stock should have low beta because one of the major risks of the business is
technological development
True
A stock (also known as "shares" and "equity) is a kind of security that denotes the ownership in a
specific association and finds his claims as a part of the assets and earnings of the corporation.
With the advancement in the technology, the stock is fed and handled through computers and
electronic devices. A coin has two sides, in the same way, technological advancements have their
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Running head: FINANCE
set of pros and cons. With the advancement in technology, many people have been able to
expand their business, get instant updates on the stock, learn more through the web (Han & Park,
2017). But, the technology also has its share of disadvantages and threats.
The stock market, in general, one is the beta value. A computer stock, should preferably have
beta value less than one (low beta). Although it will provide low returns, it is considered to be
less risky (Aven, 2016). With the daily advancements, in the technology, the cyber crime rate has
gone up considerably. This would in-turn lead to less safety for the computer stock. Hacking,
malware, phishing is carried out easily by many individuals, which would lead the computer
stock, vulnerable to any external attack. It also leads to the information of your stock, if not
protected properly, to be viewed and misused by many hackers . This would not only, diminish
the return value, but also pose a threat to the invested money. To curtail, the cyber-crime, safety
measures and precautions must be taken prior to investing money in the computer stock. The
more money and risk is involved, the more would be the beta value and return, which would
increase the threat and multiply the risk.
Since stock A has higher expected return and lower variance than stock B, a risk averse
investor prefers investment in stock A to any portfolio composed of stocks A and B
True
A risk adverse investor is that person, who knows the risks of the market well, and would rather
prefer low returns than high returns with high risk factor. Let us take a case, where stock A has
higher expected return and lower variance. The risk adverse investor would palpably choose
stock A over any portfolio composed of stock A and B. This is because, stock A provides higher
return, with low fluctuations, and thus the risk is not high. The same cannot be said for the meld
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