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Analysts across companies use realized stock returns to estimate the risk of a stock. Five years of realized returns for Celestial Crane Cosmetics Inc. (Crane Cosmetics) are given in the following table: 2012 7.50% 2013 5.10% 2014 9.00% 2015 12.60% 2016 3.90% Stock return Also note that: 1. While Crane Cosmetics was started 40 years ago, its common stock has been publicly traded for the past 25 years. 2. The returns on Crane Cosmetics's equity are calculated as arithmetic returns. Given this return data, the average realized return on Celestial Crane Cosmetics Inc.'s stock is of Crane Cosmetics's historical returns. Based on this conclusion, the standard deviation of The preceding data series represents Crane Cosmetics's historical returns is If investors expect the average realized return on Celestial Crane Cosmetics Inc.'s stock from 2012 to 2016 to continue into the future, its expected coefficient of variation (CV) is expected to equal Option Scenarios Keep the $5,000 in cash for one year. Invest in a friend's business with a 50% chance of getting $10,000 after one year and a 50% chance of getting nothing. Invest in a relative's business with a 30% chance of getting $15,000 after one year, 20% chance of getting $2,500 after one year, 50% chance of getting nothing. Suppose Erik cares about the risk involved in Options 2 and 3, and decides to select Option 1 because it has no risk. Which of the following statements would be true about Erik? He is risk-averse. He is risk-neutral. He is risk-loving. None of these descriptions is accurate. Suppose the market risk premium is currently 6%. If investors were to become more risk-averse, the market risk premium might increase to 8%. What effect would you expect this to have on the prices of most financial assets? Prices would increase. Prices would be unaffected. Prices would decrease
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