Question

1. Why do we use percentage returns rather than dollar returns when we compare returns?

2. Last year your portfolio made 15%; the stock market made 10%, and the risk free rate was 2%. If the CAPM is correct, what must the beta of your portfolio be?

3. The world can change but basic financial math doesn’t. The obvious decreases in future cash flows from the virus is bringing stocks down. What is the other, probably more important factor driving valuation models now?

4. You have a $100,000 cash balance in a margin account, how much stock can you buy with that balance?

5. Saturday, Warren Buffet held an over four-hour annual shareholder meeting on Yahoo Finance. It was insightful in many ways. An important thing he talked about, and you can look up online, is that he did something that is so hard for the average investor to do. I talked about it when we went over trading and said it is the most important thing to know when investing. What did he admit?

6. Mr. Buffet also echoed something else I tried to convey during the class. What did he say was the best investment for nearly everyone and why? (Don’t say America.)

7. If you are going to buy Mr. Buffet’s best investment, what is the easiest and cheapest way to do it?

8. The Federal Reserve made the historic decision to buy corporate and municipal debt, including junk bonds. What’s a junk bond? Be specific.

9. Why are stock options so risky?

10. What is the most important thing to determine first on a price chart?

Answer #1

1.The dollar return is used to calculate the net proceeds or losses whereas the percentage return shows the gain or loss as a percentage.

Percentage returns are not necessarily more convenient but they are more meaningful than aboslute dollar returns.

foe example;

If you make $100 on a $1000 investment ,your investment performance is far better than if you make $100 on $100,000 investment.The dollar return(i.e $100) is the same in both cases,but in the first investment you have made a 10% return and in second you have made 0.1% return.

Since,the percentage return provide meaningful results as shown above,hence we use percentage returns rather than dollar returns to compare returns.

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