Investment returns and risk premiums

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

Sample Solution