Question

3.What is a T-account, how is it used, and what is the equation?

4.What is the relationship between risk and return and how is risk measured?

5.What is the return on a portfolio composed of the following 5 investments in equal amounts: Investment A increased 5%, Investment B increased 12%, Investment C decreased 3%, Investment D increased 0.5% and investment E increased 7%.

Answer 1

3.

What is a T-Account?

A T-account is an informal term for a set of financial records that uses double-entry bookkeeping. The term describes the appearance of the bookkeeping entries. First, a large letter T is drawn on a page. The title of the account is then entered just above the top horizontal line, while underneath debits are listed on the left and credits are recorded on the right, separated by the vertical line of the letter T.

A T-account is also called a ledger account.

HOW IT IS USED?

In double-entry bookkeeping, a widespread accounting method, all financial transactions are considered to affect at least two of a company's accounts. One account will get a debit entry, while the second will get a credit entry to record each transaction that occurs.

The credits and debits are recorded in a general ledger, where all account balances must match. The visual appearance of the ledger journal of individual accounts resembles a T-shape, hence why a ledger account is also called a T-account.

A T-account is the graphical representation of a general ledger that records a business’ transactions. It consists of the following:

• An account title at the top horizontal line of the T
• A debit side on the left
• A credit side on the right

WHAT IS THE EQUATION?

4.

What is the relationship between risk and return ?

Investment risk is the idea that an investment will not perform as expected, that its actual return will deviate from the expected return. Risk is measured by the amount of volatility, that is, the difference between actual returns and average (expected) returns. This difference is referred to as the standard deviation. Returns with a large standard deviation (showing the greatest variance from the average) have higher volatility and are the riskier investments.

how is risk measured?

standard deviation can be used to define the expected range of investment returns. For the S&P 500, for example, the standard deviation from 1990 to 2008 was 19.54 percent. So, in any given year, the S&P 500 is expected to return 9.16 percent but its return could be as high as 67.78 percent or as low as −49.46 percent, based on its performance during that specific period.

5.

INCREASE IN RETURN BY 4.3%

INVESTMENT	RETURN
A	5%
B	12%
C	-3%
D	0.50%
E	7%
TOTAL RETURN	21.5%
PORTFOLIO RETURN	4.30%