Investment Returns and Risk

Question 1

Expected Return

Answer 1

The percentage yield that an investor forecasts from a specific investment over a set period of time.

Question 2

Return Formula

Answer 2

r= (dividend+ price1 + price0)/price0

Question 3

What is risk?

Answer 3

• It is a quantifiable variation of possible outcomes.

- Wider range of outcomes=higher risk.

Question 4

How is risk measured?

Answer 4

Standard Deviation.

It measures the volatility, riskiness of an asset, or portfolio returns.

Question 5

Risk-return trade-off

Answer 5

Investors trade-off higher risk by demanding a higher expected return.

Question 6

Risk-free rate

Answer 6

The required rate of return or discount rate for a risk-less investment, usually referred to as Rf.

Question 7

Risk Premium

Answer 7

As risk increases, investors will demand high returns.

Question 8

Risky Asset

Answer 8

Expected Rate= risk free rate + risk premium

Question 9

What are the major asset classes?

Answer 9

• Risk-free: short-term treasury bills
• Bonds: medium-long term debt issued by government.
• Equities: ordinary shares issued by corporations.

Question 10

What is asset allocation?

Answer 10

It refers to diversifying among different kinds of asset types (treasury bills, corporate bonds, common stocks)