Financial markets have been studied closely over the last century. Which of the following facts can we most likely conclude from financial markets over time?Group of answer choicesReturns on less risky assets have been lower on average that returns on more risky assetsThe real interest rate has been slightly negative on averageReturns on risky assets are highly uncorrelated with each otherPast performance is a good indication of future performanceWe can conclude that all of the facts listed here as answers are correct PreviousNext
Question
Financial markets have been studied closely over the last century. Which of the following facts can we most likely conclude from financial markets over time?Group of answer choicesReturns on less risky assets have been lower on average that returns on more risky assetsThe real interest rate has been slightly negative on averageReturns on risky assets are highly uncorrelated with each otherPast performance is a good indication of future performanceWe can conclude that all of the facts listed here as answers are correct PreviousNext
Solution
The most likely conclusion from studying financial markets over time is that "Returns on less risky assets have been lower on average than returns on more risky assets."
This is a fundamental principle of finance known as the risk-return tradeoff, which states that the potential return rises with an increase in risk. Low levels of uncertainty (low-risk investments) are associated with low potential returns, whereas high levels of uncertainty (high-risk investments) are associated with high potential returns.
The other options are generally not accurate:
- The real interest rate has not been slightly negative on average. While it can fluctuate, it's typically positive.
- Returns on risky assets are not highly uncorrelated with each other. In fact, they often move in the same direction.
- Past performance is not a good indication of future performance. This is a common disclaimer in the investment world because there are so many variables that can affect future performance.
- Therefore, we cannot conclude that all of the facts listed here as answers are correct.
Similar Questions
According to the efficient market hypothesis, prices of securities in financial markets fully reflect which of the following?Group of answer choicesPrivate informationAll available informationLimited informationOnly past information
In an efficient market:Question 10Select one:a.security prices are seldom far above or below their justified level.b.share prices react quickly to new information.c.investors will not make superior returns consistently.d.All of the given answers are correct.
Which of the following statements does not reflect conventional wisdom with respect to risk analysis:It’s very hard to time market exits and entriesThe markets are over-valued and are due for a correctionThe market rewards additional risk by providing additional returnNegatively correlated returns would result in diversification benefitsEfficient markets suggest that prices reflect existing information
Which one of the following statements is NOT true?Group of answer choicesIn an informationally efficient market, market prices adjust quickly to new information about a security as it becomes available.Competition among investors is an important driver of market efficiency.In a semi strong efficient market, information about past price movements is already incorporated in the current market price.If market prices reflect all relevant information about securities at a particular point in time, the market is informationally efficient.In a semi strong efficient market, market prices adjust quickly to new information about a security as it becomes available.
Which of the following is not a source of financial risk?A) Exchange rates B) Interest rates C) Market Share D) Credit Terms
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.