Question

1) Simple interest is akin to the effective annual rate (EAR) and compound interest is akin to the annual percentage rate (APR).

True

False

2) If you were required to estimate the average return for one category of securities for the coming year, history tells us that you should have the greatest degree of confidence estimating which of the following?

a) small-company stocks

b) large-company stocks

c) long-term government bonds

d) 3 month treasury bills

3) Evidence from the 50 year period of 1950-1999 indicates that returns and risk (as measured by the standard deviation of returns) are positively related.

True

False

Answer 1

1) The statement is False. The opposite is true.

Simple interest is akin to the annual percentage rate (APR) and compound interest is akin to the effective annual rate (EAR).

2) The correct answer is option b) large-company stocks

If you have the greatest degree of confidence estimating the returns of large-company stocks, then you can estimate the average return for one category of securities for the coming year.

3) The statement is True.

Risk and return are positively correlated.

The higher is the risk taken, the higher is the historical return.

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