05 Risk and Return

Question 1

Investors want to be (…) for taking higher amounts of risk.

Answer 1

Compensated, rewarded

Question 2

The standard deviation of a distribution..

Answer 2

HAS to be a positive value

Question 3

Two investments have the same level of risk, but different rates of return. Investors, in this case will choose..

Answer 3

The investment with a higher rate of return.

Question 4

Function to calculate the expected return of an investment

Answer 4

=AVERAGE(

Question 5

When comparing the returns of an individual share to a market index..

Answer 5

The returns of the individual share will show more variability than those of the market index.

Question 6

The normal distribution is commonly called..

Answer 6

The bell curve

Question 7

The normal distribution is..

Answer 7

Symmetric

Question 8

If the capital gain return from owning a share is positive..

Answer 8

Then the total return from owning the same share does not have to be negative.

Question 9

Function to calculate Standard Deviation

Answer 9

=STDEV(

Question 10

The rate of return that investors require depends on..

Answer 10

Both the price of the investment AND the risk associated with the investment

Question 11

The risk-return trade off

Answer 11

The relationship between risk and return

Question 12

The capital gain component of a share’s return considers..

Answer 12

The increase in the price of a share divided by the beginning price of the share.

Question 13

Bonds are…

Answer 13

NOT riskier than shares, on average. (bonds are fixed interest investments)

Question 14

Standard deviation

Answer 14

Allows us to measure risk of investment.

Question 15

Relationship between risk and return

Answer 15

In finance, investors need to be compensated (rewarded) for holding additional risk, therefore higher risks mean higher expected returns.

Question 16

Invest in savings account versus the share market

Answer 16

You would expect a lower expected return on average for putting your money into a savings account relative to holding stocks. This is because in finance, investors demand a higher return for taking higher risks, and stocks are more risky than fixed-interest savings accounts.

Question 17

Investing in start-up tech company versus the biggest company on share market

Answer 17

You would expect a higher expected return on average for putting your money into a start-up relative to a big company. This is because in finance, investors demand a higher return for taking higher risks, and small companies are more risky than large, well-established companies.

Question 18

What does ‘risk’ mean in finance?

Answer 18

Risk means uncertainty and can go both ways – up and down.

Question 19

Investors will always choose…

Answer 19

Lower risk for a given level of return and higher return for a given level of risk.

Question 20

Total Return (equation)

Answer 20

Total Return = (Current Price - Price Paid) / (Price Paid)

Question 21

With the same level of risk..

Answer 21

Investors prefer the investment with the higher return.

Question 22

If investors expect the same return..

Answer 22

Investors prefer the investment with less risk.

Question 23

If standard deviation is small (curve is steeper, closer)..

Answer 23

Risk is small.