1. The idea that investors in a common stock may expect a lower total return if

ID: 2754222 • Letter: 1

Question

1. The idea that investors in a common stock may expect a lower total return if they purchase a

stock with limited price volatility rather than one with high price volatility suggests that:

A. investors are irrational.

B. there is a relationship between risk and return.

C. real rates of return will be lower during periods of price stability.

D. stocks should be avoided when inflation is low.

2. What is the approximate variance of returns if over the past 3 years an investment returned 8%,

-12%, and 15%?

A. 31

B. 131

C. 182

D. 961

B) There is a relationship between risk and return.

2) The Investment returned 8%, -12% and 15 %

Average return = 8%+15%-12% = 11%/3 = 3.67%

Difference between average return and each annual return

= 8 -3.67 = 4.33

= -12 - 3.67 = -15.67 and 15-3.67 = 11.33

Square each difference

= 4.33 x 4.33 = 18.75

= -15.67 x -15.67 = 245.55

= 11.33 x 11.33 =128.37

Add the square of the difference

=18.75+245.55+128.37 = 392.67

=392.67/3-1 = 196

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