Question

1. Define the terms return and risk. What is the relationship between an investment’s return and risk?

2. Given the data below, find the average return and standard deviation of return for security A:

Year	Return on security A
2017	10%
2018	12%
2019	14%

3. Assume that security B has an average return of 16% and a standard deviation of return of 3.3%, and that correlation between security A in (b) and security B is -1. Calculate the average return and standard deviation of return for a portfolio 50% invested in security A and 50% invested in security B. Comment on the result.

Answer 1

1. Return means the overall appreciation in the value of asset of an investment and total payout by the investment.return could be comprised of capital appreciation and dividend payments and capital gain payments.

risk refers to all such uncertainty that are related to investment that can cause a threat to the investment value and there may be a possibility of decline in the value of overall investment.

Relationship between investment return and investment risk is directly correlated because when there is higher risk, there is possibility of higher return and when there is lower risk that possibility of lower return .