Solving for Rates What Annual Rate of Return Is Implied

question 10

Multiple Choice

Solving for Rates What annual rate of return is implied on a $1,000 loan taken next year when $1,500 must be repaid in year 5?

• A)8.45 percent
• B)10.00 percent
• C)10.67 percent
• D)12.50 percent

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Definitions:

Risk-Averse Investor

An investor who prefers lower returns with known risks rather than higher returns with unknown risks.

Slope of the Budget Line

The rate at which one good can be traded for another, reflecting the relative prices of two goods.

Standard Deviation

An indicator that calculates how much a group of figures deviates or scatters from each other.

Risky Asset

An asset that carries a significant degree of risk of losing value, but also offers the potential for higher returns as compared to safer investments.