Chapter 22: Relationship between the returns on asset classes

Question 1

Define the REQUIRED return on an asset

Answer 1

The required return is the return that will convince an investor to purchase a particular asset.
The investor will require that the return provided, compensates for the risk taken.

Question 2

The formula for the nominal required return is:

Answer 2

risk-free real return
+ expected inflation
+ risk premium

Question 3

Define the EXPECTED return on an asset

Answer 3

The expected return is what an investor expects to receive from an asset in terms of income and capital gains.

Question 4

The formula for the EXPECTED return is:

Answer 4

expected income
+ expected capital growth

(initial income yield + expected capital growth)

Question 5

Fairly priced asset

Answer 5

Required return = Expected return

Question 6

For fixed interest investments, how is the return likely to compare with equity returns if inflation is higher than expected

Answer 6

The fixed interest investment will give a poor return relative to equity.