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solve09 - FNCE 3010(Durham HW 9(Risk and return 1 Given...

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FNCE 3010 (Durham) HW 9 (Risk and return) 1. Given that Millcom International Cellular was up by over 1,200 percent for 2003, why didn’t all investors hold Millcom International Cellular? Solution: They had no way of knowing it would perform so well in advance. Furthermore, past performance is a poor indicator of future performance. And finally, Millcom is a risky stock. Many investors may not want to take on this risk. 2. We have seen that, over long periods of time, stock investments have tended to substantially outperform bond investments. However, it is not at all uncom- mon to observe investors with long horizons holding entirely bonds. Are such investors irrational? Solution: Stocks are riskier. Some investors are highly risk averse, and the extra possible return doesn’t attract them relative to the extra risk. Also, investors had no way of knowing about the relative performance of stocks versus bonds in advance. (On the other hand, over very long horizons, experience suggests strongly that stocks are very likely to outperform bonds — and possibly by a great deal).
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