How do you feel about the followingstatement: “Avoiding risks is the biggest risk of all”? That statementmay seem contradictory at first, but it makes more sense if you applythe concept to various situations in life and business. For example,many people pursue a college degree because they feel it will increasetheir job prospects and earning potential. This can turn out to be truebut is not a guarantee. Others may find this path too risky and preferto enter the job market right away. Although the first group of peopletake the risk of their college degree paying off in the long run, thesecond group are also taking the risk of limiting their potential forthe future. Similarly, the nature of entrepreneurship is built upon therisk of investing time and money into something that could potentiallyfail. Even established businesses could become outdated or beoutperformed if they stop taking certain risks. Just as the concept ofrisk can apply in a general sense, it also applies to investments thatindividuals and businesses make. Calculated investment risks are notalways guaranteed to pay off, but a zero-risk approach may not be assafe as it sounds either.

In this Assignment, you will address questions related to returns and risk premiums.

To prepare for this Assignment:

• Review this week’s Learning Resources.
• Refer to the Academic Writing Expectations for 2000/3000-Level Courses as you compose your Assignment.5

Submit your responses to the following prompts.

• Explain the differences between the arithmetic return and thegeometric return. Include in your explanation what factor determines thedifference between arithmetic returns and geometric (compounded)returns. (75–150 words, or 1–2 paragraphs)
• If you own a stock with volatile returns over a 2-year period, willthe average return be higher or lower than the geometric return? Explainwhy. (75–150 words, or 1–2 paragraphs)
• Why is it more convenient to display your investment returns inpercentage terms rather than dollar terms? (75–150 words, or 1–2paragraphs)
• Would a common stock or a corporate bond demand a higher risk premium? Explain why. (75–150 words, or 1–2 paragraphs)
• What are the differences between a bond risk premium and an equity risk premium? (75–150 words, or 1–2 paragraphs)
• Explain whether it is possible to earn excess returns without taking on additional risk. (75–150 words, or 1–2 paragraphs)