CH 7

Question 1

Return

Answer 1

profit on an investment’s return will be different than expected

Question 2

Risk

Answer 2

the chance that an investment’s return will be different than expected

Question 3

Dollar return

Answer 3

return on an investment measured in actual dollars

Question 4

What are the two components of a dollar return?

Answer 4

Cash you recieved while you owned the investment (ie dividends), the vale of the value of the asset you purchase may change (capital gain or captial loss)

Question 5

Percentage Return

Answer 5

that investment’s rate of return or the amount earned on each dollar invested

Question 6

Annualized return

Answer 6

any investment’s return over a given perios that is re-scaled to a period of one year

Question 7

Holding Period return

Answer 7

the percentage return over a particular time period

Question 8

Geometric Average

Answer 8

answers the question: What was the average compound return per year over a particular period?

the n_th root product of n numbers, the average compound return per year of an investment over a particular period

Question 9

arithmetic average

Answer 9

answers the question: What was the return in an average year over a particular period?

the average rate of return per period on an investment, generally expressed either as the geometirc or arithmetic mean

Question 10

What does arithmetic average assume?

Answer 10

independence of variables and can be overly optimistic (especially for longer-term holdings).

Question 11

What does geometric average assume?

Answer 11

dependence of variables and can be overly pessimistic (especially for shorter-term holdings).

Question 12

Risk-free rate

Answer 12

the return an investor can earn on a risk-free investment (like U.S. Treasury bills)

Question 13

Risk Premium

Answer 13

the return in excess of the risk-free rate that an investment is expected to yield

Question 14

Coefficient of variation (CV)

Answer 14

standard deviation/expected return

Question 15

Capital Allocation Line

Answer 15

a graph created to measure risk/return tradeoff of investing into any combination of the risk-free rate and a risky asset

Question 16

The return on an asset is the what for investing?

Answer 16

Reward

Question 17

Geometric averages are likely better indicators of what is compared to arithmetic averages?

Answer 17

Potential future returns

Question 18

Investors can combine the geometric average with the arithmetic average using what?

Answer 18

Blumes formula

Question 19

In investing risk is measured with an asset’s what and is generally reported using what?

Answer 19

volatility and standard deviation

Question 20

The standard deviation of the risk-free asset is always assumed to be what?

Answer 20

zero