BU457 Study Guide - Final Guide: Portfolio Investment, Risk Aversion, Efficient-Market Hypothesis

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It ems necessary to trade off these two desirable information qualities. Instead of dwelling on questions of existence of net income, accountants have turned their efforts to making financial statements more useful. Portfolio risk: when transactions costs are not ignored, a risk-averse investor"s optimal investment decision is to buy relatively few securities, rather than the market portfolio. In this way, most of the benefits of diversification can be attained, at reasonable cost. Information about expected returns and betas is useful to investors, as it enables them to assess the expected returns and riskiness of the portfolios and choose one that gives them their preferred risk-return tradeoff. Securities market efficiency: markets being efficient or not efficient is the wrong question. However, available information may not have been sufficient to fully diagnose this risk. For example, complex financial instruments such as the asset-backed securities lacked transparency.

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