12ABM 4 RISK & RoR

At the end of this module, you should be able to:

• ​Define and differentiate the expected, required, and realized returns on investments

• Differentiate the types of risks and explain the risk-return trade off

Multiple Choice

Why is understanding the relationship between risks and rate of return important in business finance?

• It helps in making informed investment decisions.

• It ensures guaranteed profits.

• It eliminates all financial risks.

• It is only relevant for large corporations.

Multiple Choice

Which of the following best describes 'Interest' as a type of return?

• Profit from selling stocks

• Earnings from lending money or putting money in a bank

• Increase in real estate value

• Dividends from company shares

Fill in the Blanks

The formula for Rate of Return (ROR) is Interest earned divided by

.

Fill in the Blanks

Bradley invests Php1,000,000.00 in a 90-day T-bill with an interest rate of 9% per annum. Bradley's return on investment if he holds the T-bill until its maturity is

%.

Multiple Choice

Assume that at the time SGT bought the stocks, it incurred a broker's fee of 2% and a commission of 1/4 of 1% of Php50,000. What is the return on investment?

• 12.5%

• 6.975%

• 9.54%

• 9.975%

Multiple Choice

Which of the following factors are considered when calculating expected return?

• State of the economy

• Occurrence probability

• Expected outcome

• All of the above

Multiple Choice

Which of the statements best describes expected return vs realized return?

• Expected return is the historical profit; realized return is the future profit estimate.
• Expected return is the average gain; realized return is the potential loss incurred.
• Expected return is the anticipated profit; realized return is the actual profit earned.
• Expected return is the total investment; realized return is the projected profit.

Multiple Choice

Which of the following statements best describes "risk=return trade-off"?

• The risk-return trade-off is irrelevant for short-term investments and does not affect decisions.
• Investors focus solely on minimizing risk without considering potential returns.
• Higher risk always guarantees higher returns, leading to uniform investment choices.
• The risk-return trade-off influences investment decisions by requiring investors to balance their desire for higher returns with their willingness to accept risk, leading them to choose between different asset classes based on their risk tolerance.

Fill in the Blanks

The potential return rises with an increase in

Multiple Choice

Which of the following factors should an investor consider when evaluating the risk-return trade-off?

• Risk tolerance, time horizon, and potential to replace lost funds

• Market trends and stock prices

• Interest rates and inflation

• Government policies and regulations