Question

Which statement is not correct?

a) The distribution of returns does not affect the expected average rate of return.
b) To find the dividend yield, we can subtract the capital gain yield from the total stock return.
c) Average geometric return is a better indicator than the average arithmetic return for growth.
d) Wider the distribution of return, riskier is the investment.

Answer 1

The incorrect statement is that the dividend yield can be found by subtracting the capital gain yield from the total stock return. The right way to calculate dividend yield is to divide the annual dividends by the stock price. Moreover, wider distribution of returns indicates higher risk and geometric mean is a better measure for growth than arithmetic mean.

Step-by-step explanation:

The statement that is not correct is: 'To find the dividend yield, we can subtract the capital gain yield from the total stock return.' This is not correct because the dividend yield is calculated by taking the annual dividends paid and dividing them by the stock price, not by subtracting the capital gain yield from the total return.

Additionally, while the distribution of returns does affect the expected average rate of return, the average geometric return is typically a better indicator of investment performance over time than the average arithmetic return because it accounts for the compounding effect.