Chapter 11: Intro to Risk, Return, Opportunity Cost of Capital

Question 1

Percentage Return Formula =

Answer 1

Percentage Return = (Capital Gain + Dividend) / Initial Share Price
OR
Percentage Return = Dividend yield + Percentage Capital Gain

Question 2

Real Rate of Return Formula =

Answer 2

1 + real rate of return = (1 + nominal rate of return) / (1 + inflation rate)

Question 3

Rate of Return on Common Stocks Formula =

Answer 3

Interest Rate on Treasury Bills + Market Risk Premium

Question 4

Variance Formula =

Answer 4

average of squared deviations around the average

Question 5

Standard Deviation Formula =

Answer 5

Square Root of Variance

Question 6

Portfolio Rate of Return Formula =

Answer 6

Portfolio Rate of Return =
(fraction of portfolio in 1st asset x rate of return on first asset) /
(fraction of portfolio in second asset x rate of return on 2nd asset)

Question 7

What is the Market Index?

Answer 7

Measure of the investment performance of the overall market.

Question 8

What is the Dow Jones Industrial Average?

Answer 8

Index of the investment performance of a portfolio of 30 ‘blue-chip’ stocks.

Question 9

What is the S&P’s Composite Index

Answer 9

Index of the investment performance of a portfolio of 500 large stocks.

Question 10

What is the maturity premium?

Answer 10

Extra annual return from investing in long-versus short-term Treasury securities.

Question 11

What is the risk premium?

Answer 11

Expected return in excess of risk-free return as compensation for risk.

Question 12

What is the definition of variance?

Answer 12

Average value of squared deviations from mean. A measure of volatility.

Question 13

What is standard deviation?

Answer 13

The square root of variance. A measure of volatility.

Question 14

What is the Expected return formula?

Answer 14

Expected return = probability-weighted average of possible outcomes

Question 15

What is the formula for variance?

Answer 15

Variance = average of squared deviations around the average