Question

Describe the general relation between risk and return that we observe in the historical bond and stock market data.

Answer #1

Risk and return are directly related. Higher the risk, higher the return and lower the risk, lower the return.

Bond historically earn lower return due to their lower risk in comparison to equity or share market. Bond earns fixed income on regular intervals or interest earning is defined during the issuance hence, it has definite cash flows which gives assurance to investors. During liquidation of firm the bond holders are paid before equity and preference shareholders hence, carry lower risk than shareholders.

Share market historically yield higher return as they carry higher risk in comparison to bond market. The income of shareholders is not definite and highly volatile hence, it carries high risk. The shareholders are paid at last during the liquidation of firm hence, it is remains in highest of risk category.

Characterize the historical return, risk, and risk-return
relationship of the stock, bond, and cash markets. Explain the
risk-return trade-off.
Assume that you are 25 years old and you inherited $5,000 from
your grandmother. You would like to invest the money either for
your retirement in 40 years or for a vacation to Europe in two
years. Would your tolerance for risk vary, depending on when you
planned to use the money? Relate the risk-return trade-off to your
plans for the...

Use the following data to explore the risk-return relation and
the concept of beta for Apple stock, Alphabet (Google) stock, and
the S&P 500 market index:
Year
Apple Stock Price
Alphabet Stock Price
S&P 500 Market Index
2017
$174.09
$1,072.01
2,601.42
2016
$115.82
$807.80
2,238.83
2015
$105.26
$765.84
2,043.94
2014
$113.99
$521.51
2,058.90
2013
$80.01
$559.76
1,848.36
2012
$72.80
$358.17
1,426.19
Market risk premium: RPM =
4.01%
Risk-free
rate: rRF =
1.30%
If you formed a portfolio that consisted of...

We learned that if the market interest rate for a given bond
increased, the price of the bond would decline. Applying this same
logic to stocks, explain
(a) how a decrease in risk aversion would affect stocks' prices
and earned rates of return;
(b) how this would affect risk premiums as measured by the
historical differences between returns on stocks and returns on
bonds; and
(c) what the implications of this would be for the use of
historical risk premiums...

Use the following data to explore the risk-return relation and
the concept of beta for Apple stock, Alphabet (Google) stock, and
the S&P 500 market index:
Year
Apple Stock Price
Alphabet Stock Price
S&P 500 Market Index
2017
$174.09
$1,072.01
2,601.42
2016
$115.82
$807.80
2,238.83
2015
$105.26
$765.84
2,043.94
2014
$113.99
$521.51
2,058.90
2013
$80.01
$559.76
1,848.36
2012
$72.80
$358.17
1,426.19
Part 1: Risk and Beta
Make a scatter plot of stock returns (y-axis) against market
returns (x-axis) for both...

How we measure the
risk?
•
How we measure
return?
•
What is the
difference between Average return and Geometric?

Describe relation between marginal cost & average total cost.
Describe relation between marginal cost and average variable
cost.

The expected return on Microsoft stock is 8.40 percent and
historical market return is 10.00 percent. Microsoft has a Beta of
0.82. What is the risk-free rate of return?
Group of answer choices
2.22 percent
2.11 percent
1.11 percent
1.76 percent
1.63 percent

A) We have the following historical returns on
a portfolio. Assume the monthly risk-free rate in the same time
period was 3%. Estimate the Sharpe ratio of this portfolio.
month
return
1
10%
2
5%
3
-2%
4
3%
5
15%
B) Consider the same historical record above, what is the
stock's geometric average monthly return in that time period?

We know that during the last 10 years, the average historical
return on a market index is 12%. We also know that the average
inflation rate and average risk-free rate over the last 10 years
are 2% and 5%, respectively. What is the real risk premium using
the exact Fisher equation?
Select one:
a. 2.94%
b. 6.86%
c. 7.00%
d. 9.80%
e. 10.00%
Given the following share price history, calculate the standard
deviation of the returns on this stock.
Year...

A(n) ________ is a graphic depiction of the relation between
the maturity and rate of return for bonds with similar risks.
Select one:
a. yield curve
b. risk-return profile
c. aggregate demand curve
d. supply function

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