Question

1. Understand how capital gains and percentage returns are calculated. Explain the difference between average stock returns and risk-free returns.

Answer 1

Capital gain is nothing but the gain we make when we sell the asset we purchased at higher than purchase price

Capital Gain= final price-initial price

Percentage return=(capital gain/initial price)*100

Average stock returns is nothing but the average of stock return for n years and it is calculated as

average stock return=(return 1+return 2+----- return n)/n

Risk free return is the return we get for treasury bill of 6 months and later which is not having any risk as it is backed by government