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Exam 7: An Introduction to Risk and Return-History of Financial Market Returns

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Question 21

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Arithmetic average rate of return takes compounding into effect.

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Question 22

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The expected rate of return is the weighted average of the possible returns for an investment.

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Investors are always rewarded for taking higher risk with higher realized returns.

If an investor holds earns 10% on her investment in the first year and loses 10% the next year,she will have neither a gain nor a loss.

During the financial crisis of 2007-2009,returns on real estate investment trusts (REITS)and stocks moved in opposite directions.

Why do the arithmetic average return and the geometric return differ?

Which of the following best measures an asset's risk?

Riskier investments have traditionally had lower returns than less risky investments have had.

What is the arithmetic average return of Roddy Richard's investment?

The higher the standard deviation,the less risk the investment has.

You are considering investing in a firm that has the following possible outcomes: Economic boom: probability of 25%;return of 25% Economic growth: probability of 60%;return of 15% Economic decline: probability of 15%;return of -5% What is the expected rate of return on the investment?

Each of the following would tend to weaken the Efficient Market Hypothesis EXCEPT

Historically,in the United States stocks have had higher returns and greater volatility than have government bonds.

You are considering investing in a project with the following possible outcomes: Probability of Investment States Occurrence Returns State 1: Economic boom 15% 16% State 2: Economic growth 45% 12% State 3: Economic decline 25% 5% State 4: Depression 15% -5% Calculate the expected rate of return for this investment.

The difference between returns on stocks and government bonds is known as

Strategies that exploit market inefficiencies tend to lose their effectiveness when they become widely known.

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today.If you sell the stock today for $89.00,what is your rate of return?

Treasury Bills have less default risk than do Government Bonds.

If an investor holds a stock for three years,the value at the end of three years will always be the initial cost of the stock times (1 + arithmetic average return)to the third power.

Even though an investor expects a positive rate of return,it is possible that the actual return will be negative.