Final answer:
The question seeks to determine the annual risk of a bank stock, integrating the core financial concepts of expected rate of return, risk, and the tradeoff between the two in investment decisions. It emphasizes the higher average returns needed to compensate for higher risk in investments like stocks.
Step-by-step explanation:
The question pertains to understanding the annual risk associated with a bank stock and illustrates the general concept of risk and return in investment choices. The expected rate of return is a measure of what an investment is likely to yield over a period, while risk evaluates the uncertainty around that yield. You have examples such as bank accounts offering low risk and returns, bonds with moderate levels and stocks which provide the highest potential returns but with significantly higher risk.
Investors expect that higher risk will be accompanied by higher potential returns as a compensation for that risk. This tradeoff between risk and return is fundamental to investment decisions. The question seems to require calculation of this risk based on historical data of stock returns, which may involve statistical measures such as standard deviation.
Furthermore, the concept of actual rate of return, which encompasses all gains from an investment, is distinct from the expected return and can fluctuate widely for high-risk investments like stocks compared to more stable investments such as bank accounts or bonds.