Investments Mini-Quiz: Risk vs. Reward

  1. Which of the following statements concerning the risk-return trade-off is (are) correct?
    1. Investors tend to demand higher rates of returns for greater risk.
    2. It is composed of two parts: systematic risk and unsystematic risk.
    3. To earn higher rates of return, investors must be willing usually to accept a higher degree of risk.

      1. I only
      2. I and II only
      3. I and III only
      4. II and III only
      5. I, II and III

  2. All the following statements concerning rates of return are correct EXCEPT:
    1. The required rate of return is the minimum rate of return an investor must expect that will induce him or her to commit funds to a particular risky investment.
    2. The key words pertinent to a definition of required rate of return are minimum expectation and minimum inducement.
    3. An investor’s realized return is only determinable when all the facts are known, after the investment has been liquidated or otherwise terminated.
    4. Investors tend to realize their expected returns on risky securities more often on a short-term basis than on a long-term basis. risk.

  3. 3. Which of the following statements correctly describes the risk/return tradeoff?
    1. Investment vehicles with a great potential for capital appreciation also tend to have a great potential for loss of purchasing power.
    2. Investment vehicles with a greater variability in returns tend to have lower growth potential.
    3. Investment vehicles with a great potential for reward through capital appreciation also tend to have a great potential for loss of principal.
    4. Both risk and return tend to be lowest for investors who trade frequently.


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