Question

Measuring stand-alone risk using realized (historicat) data Returns earned overa glven time period are called reafized returns. Historical data on realized returns is often used to estimate future results. Analysts across companies use reabzed stock returns to estimate the risk of a stock. Consider the case of Celestial Crane Cosmetics Inc. (CCC): Flve years of realized retums for CCC are given in the following table. Remember:

a. While CCC was started 40 years ago, its common stock has been publicly traded for the past 25 years.
b. The retums on its equity are calculated as arithmetic returns.
c. The historical returns for CCC for 2014 to 2018 are: hapter 8 Assignment Given the preceding data, the average realized return on CCC's stock is The preceding data series represents of CCC's historical returns. Based on this conclusion, the standard deviation of CCC's historical returns is If inventors expect the average realized return from 2014 to 2018 on CCC's stock to continue into the future, Its coefficient of variation (CV) will be

Answer 1

Investments are evaluated by their expected rate of return and associated risk. The expected rate of return is an average projection over time, while risk measures the uncertainty of returns.

Step-by-step explanation:

Understanding Risk and Return in Investments

When analyzing investments, it is crucial to consider both the expected rate of return and the risk associated with it. The expected rate of return is a projection of future earnings from an investment, expressed as a percentage. This metric takes into account potential interest payments, capital gains, or increased profitability over time. In contrast, risk measures the uncertainty of achieving the projected earnings. Higher risk investments often demonstrate a broad range of potential outcomes, including returns that significantly deviate from the expected value, both positively and negatively.

The actual rate of return is a historical measure that indicates total earnings from an investment after a specified period, including both capital gains and interest. However, past performance is not a reliable indicator of future results, and hence, relying solely on historical data to predict future risk and returns might be misleading.

Investing in the stock market, such as buying stocks in the S&P 500 index, has historically provided higher returns compared to bonds or savings accounts. This is due to the greater volatility of stocks, which can result in higher gains as well as steeper losses. Consequently, higher risk in the stock market has the potential to be accompanied by higher returns, attracting investors despite the uncertainty involved.