What does “investment risk” mean?
Set up an illustrative probability distribution table, or “payoff matrix,”
for an investment with probabilities for different conditions, returns
under those conditions, and the expected return.
Which of the two stocks graphed in Figure 8-2 is less risky? Why?
How is the standard deviation calculated based on (1) a probability
distribution of returns and (b) historical returns?
Which is a better measure of risk if assets have different expected
returns: (1) the standard deviation or (2) the coefficient of variation?
Why?
Explain why you agree or disagree with the following statement:
“Most investors are risk averse.”
How does risk aversion affect rates of return?
An investment has a 50 percent chance of producing a 20 percent
return, a 25 percent chance of producing an 8 percent return, and a
25 percent chance of producing a 12 percent return. What is its
expected return? (9%)
An investment has an expected return of 10 percent and a standard
deviation of 30 percent. What is its coefficient of variation? (3.0)
