An Investor Is Faced with the Decision of Whether to Invest

question 34

Multiple Choice

An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return.Which of the following seems most likely?

• A) The 20% stock is a better investment.
• B) The 14% stock is overpriced.
• C) Both stocks will have approximately the same return.
• D) Both stocks are priced correctly given their perceived risk.

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Definitions:

Compounded Monthly

A method of calculating interest where interest is added to the principal balance of an investment or loan once a month.

Future Value

The value of an investment or asset at a specified date in the future, taking into account factors such as interest rates or earnings.

Ordinary Annuity

A sequence of identical payments that are distributed at consistent intervals, where the initial payment is made at the conclusion of the period.

RRSP

Registered Retirement Savings Plan, a retirement savings and investment account for holding savings and investment assets, recognized by the Canadian government.