Week 7

Risk can be considered:

• as the volatility in returns

• as only the downside of uncertainty

• as the variability in future cashflows

• the volatility in returns and future cash flows

Restaurant A’s average return is 15% and its standard deviation is 12% while Restaurant B’s average return is 17% and its standard deviation is 10%.

• A risk averse investor will select A as its return is less than B

• A risk averse investor will select B as its standard deviation is less than A and its return is greater than A.

• A risk averse investor will select A as its standard deviation is greater B.

• A risk averse investor will select B as its standard deviation is less than A.

Risk is measured by calculating the:

• holding period return

• standard deviation

• arithmetic average

• geometric average

Use the following information for Southwest Beach Inn to answer the following four questions.

The holding period return for 2016 is:

• 22%

• 25%

• -10%

• Not enough information provided

The holding period return for 2020 is:

• 12%

• 7%

• -5%

• Not enough information provided

The average return for Southwest Beach Inn for period 2017-2020 is:

• 9%

• 11%

• 14%

• 17%

The standard deviation of Southwest Beach Inn returns is:

• 9%

• 12%

• 15%

• 17%

Which of the following statement is correct?

• Required return = risk free rate + risk premium

• Required return = risk free rate – risk premium

• Risk premium = required return + risk free rate

• Risk free rate = real risk free rate – inflation premium