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You recently purchased a stock that is expected to earn 12% in a booming economy, 8% in a normal economy and lose 5% in a recessionary economy. There is a 15% probability of a boom, a 75% chance of a normal economy, and a 10% chance of a recession. What is your expected rate of return on this stock?

b. Calculate the standard deviation of returns over the 4-year period for each of the three alternatives.

An investor would invest in a security for the return. However that return comes with a premium, the Risk. The higher the risk an investor is willing to take the higher the returns would

3.) If the companies sales are down, people that work for the company would suffer.

The lower the risk that is associated with an investment, that investment usually has a potential for lower returns. Conversely, if there are high levels of risk associated with an investment, and in turn a potential for a higher return.

An investment philosophy is one’s approach to tolerance for risk in investments. It may be conservative which means you accept very little risk and are generally rewarded with relatively low rates of return. Another investment philosophy is moderate also known as risk indifference, this means one accepts some risk as they seek capital gains through slow and steady growth. Lastly, one may have an aggressive investment philosophy or be more of a risker seeker. Often times, people strive for a very high return by accepting a high level of risk. Going into the game, we were informed that like

D. It would probably see no change in its revenue position as its competitors would raise their prices accordingly.

a. We were already lagging behind the market to begin with. Unless we give an increase in the basic

9. Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

level  of  return  for  a  certain  level  of  risk,  investors  compare  several  risk  measures  such  as

D. there is no way to determine what has happened to supply and demand with this information

20. Each stock’s rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be

With attention to the previous information given, the principle of risk-return tradeoff is based on the thought that individuals are opposed to taking risk, meaning individuals would prefer to get a certain return on their investment rather than risking and getting an uncertain return. (Titman, Keown, & Martin, 2014) This principle tells us that investors will receive higher returns for taking on a bigger risk however; a challenge often seen in investors is how to calculate the tradeoff between risks and return with riskier investments. A higher expected rate of return is not always a higher actual return.

D. The companies cost of service would be reduced, giving the company the ability to lower the cost to customers.

In their research study, Souder & Myles (2010) identify that risk is chiefly fundamental to investing. Böhringer & Löschel (2008) further add that there is no discussion of returns or performance that is deemed meaningful in the absence of at least some mention of the involved risk. However, the trouble for investors, who have just entered into the marketplace, involves the process of figuring where risk really lies, as well as what the difference between the various levels of risks. Relating to the manner, in which risk is fundamental to investments, a significant number of new