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Unformatted text preview: Chapter 10 Risk and Return in Capital Markets Answers to Chapter 10 Review Questions 1. The historical relation between volatility and return tells us that investors are risk averse. 2. The components of a stock’s realized return are dividend yield and capital gain. 3. If we believe that the distribution of possible returns for a stock does not change over time, then the historical average return is a good estimate of what to expect in the future. 4. The risk of an investment is the potential for an investment’s return to be different than expected. Standard deviation of returns is the measure of how volatile returns have been over a period of time. Thus, standard deviation is a good measure for how much a stock’s return may differ from its expected return. 5. There is a strong relationship between the average returns and historical volatility of portfolios, but this relationship breaks down when looking at average returns and historical volatility of individual stocks....
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This note was uploaded on 08/26/2010 for the course FINA FINA111 taught by Professor Lynnpi during the Spring '09 term at HKUST.
- Spring '09