Purchase Solution

# Stock Market Return Risk Ratio

Not what you're looking for?

If you have a certain amount of money invested in the stock market for a moment of time, then there is an expected return on that investment (the stock market goes up on average), and a risk, a variance in that return (the stock market flucuates), both of which are proportional to the amount you have invested. As those moments of time are strung together, the expected returns for the different moments add, while the risks (since they are independent from one moment to the next) combine as square root of sum of squares. You have \$10,000 to invest over one year. How should you allocate your investment over time to maximize your return/risk ratio?

##### Solution Summary

How should you allocate your investment over time to maximize your return/risk ratio is determined.

##### Solution Preview

Let there be n units of time.
For each unit of time let the expected return be E(r), (note that it is given in the problem that the returns can go up or down, but the expected return is positive, thus we deal with only expected returns).
Now, let us sum up the expected returns over n units of time, which is
n E(r). ...(1)
(As it is given in the problem that the expected returns for different moments add).

Now, we deal with the risk part.
The risk is the variance in the returns. Let us call it ...

##### Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

##### Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

##### Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

##### Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

##### Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.