ECONOMICS
RISK AND RETURN
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Stock returns vary from year to year. The more variance a stock displays the greater the potential risk. These are the rates of return for a stock over the last five years. Calculate the variance of these investment returns:10, 30, 15, 5, 20. Hint:The variance of a series of numbers is the sum of the squares of their differences from the mean (average) of the numbers divided by the number of items in the series.
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21
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53
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74
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91
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Explanation:
Detailed explanation-1: -While corporate bonds all have some level of default risk (no matter how small), U.S. Treasury bonds are used as a benchmark by the market because they have no default risk. Therefore, corporate bonds always earn a higher interest rate than Treasury bonds.
Detailed explanation-2: -During the last two centuries, after adjustment for inflation, corporate stocks have yielded an average annual real return of approximately 7 percent, compared to an average real return of about 3 percent for bonds.
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