Quiz on Return and Risk

What is the definition of return in the context of investments?

• The initial purchase price of an asset

• The amount of risk taken

• The level of profit from an investment

• The total amount invested

Which of the following is NOT a component of return?

• Market Value

• Capital Gains

• Total Return

• Income

What does the term 'time value of money' imply?

• Future cash flows are irrelevant

• It is better to receive cash sooner rather than later

• Money loses value over time

• Investments are always risky

What is the formula for calculating the real rate of return?

• Nominal Return / Inflation Rate

• Nominal Return - Inflation Rate

• Nominal Return + Inflation Rate

• Nominal Return * Inflation Rate

What is the holding period return (HPR)?

• The return on investment after taxes

• The average return over multiple years

• The total return earned from holding an investment for a specified time

• The return earned from selling an investment

Which of the following best describes the internal rate of return (IRR)?

• The discount rate that equates an investment’s cost to its benefits

• The rate of return on a risk-free investment

• The average return of the stock market

• The return required by investors

What is a risk premium?

• The total return from an investment

• The additional return required for taking on risk

• The return on a risk-free investment

• The expected inflation rate

Which of the following is a source of business risk?

• Market fluctuations

• The degree of uncertainty in a firm's earnings

• Unanticipated changes in price levels

• Changes in interest rates

What does liquidity risk refer to?

• The risk of changes in interest rates

• The risk of losing money on an investment

• The risk of not being able to sell an investment quickly without reducing its price

• The risk associated with inflation

What is the relationship between risk and return?

• Higher risk typically leads to higher returns

• Lower risk guarantees higher returns

• Higher risk typically leads to lower returns

• There is no relationship between risk and return