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Concept Review Questions
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  1. Explain the difference between the arithmetic average and the compound annual return. Which one is higher? (page 150 of the book)
  2. If stock prices rise faster than dividends, one possible explanation is that the cost of capital has fallen. Explain why. Would an average of past returns over or under estimate the cost of capital? (page 153 of the book)
  3. What are the formulas for the variance and standard deviation of returns? (pages 155-156 of the book)
  4. What are the two types of risk? Which one can be reduced by diversification? (page 162 of the book)
  5. What is the general formula for calculating the risk of a portfolio? (pages 165-166 of the book)
  6. What is beta and what is its average value? (page 167 of the book)
  7. Explain why diversification makes sense for an investor, but not generally for the firm itself. (pages 171-172 of the book)





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