is a risk that the actual return on the investment will be different from the expected return. Investors take the risk of an investment into account when deciding on the return they wish to receive for making the investment. The CAPM is a method of calculating the return required on an investment, based on an assessment of its risk. SYSTEMATIC AND UNSYSTEMATIC RISK If an investor has a portfolio of investments in the shares of a number of different companies, it might be thought that the risk of the
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project should not be undertaken as we consider the inflows of yr 5-7 as an opportunity cost of discontinuing the business in yr 4. Also we assume to recover the investment in working capital at the end of the 4 year. IRR: The internal rate of return tells us the rate at which the NPV of a project
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Risk and Rates of Return Risk – The chance that some unfavorable event will occur; investment risk can be measured by the variability of the investment’s return. Stand-Alone Risk • Probability Distributions Subjective (estimated) Objective (historical) Continuous Discrete • Expected Rate of Return … weighted average of all possible outcomes … the rate of return expected to be realized from an investment … the mean value of the
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Risk and Return “Believe me! The secret of reaping the greatest fruitfulness and the greatest enjoyment from life is to live dangerously!” —Friedrich Wilhelm Nietzsche Are You the “Go-for-It” Type? The financial crisis has people buzzing about “systematic risk.” This term means different things in different contexts. Traditionally, systematic risk has referred to the non-diversifiable risk that comes from the impact the overall market has on individual investments. This risk is also known
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QUESTIONS Joel Hasbrouck Adapted from problems originally composed by William L. Silber . I. 1. Midterm questions Assuming that the proceeds of each year are reinvested in the following years, calculate the geometric average annual return from the following sequence of returns: YR 1 = +.20, YR 2 = .15, YR 3 = +.10, YR 4 = +.06 (a) .1263 (b) .0525 (c) .0835 (d) .0443 According to modern portfolio theory, the idea that investors with different indifference curves will hold the same portfolio of risky securities
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COURSE TITLE: FINANCIAL MANAGEMENT TEACHER: FAIZA SAJJID ASSIGNMENT NO: 02 TOPIC: IMPORTANCE OF RISK AND RETURN SUBMITTED BY: MUBASHIR TARIQ, JASIM RASHID, WAQAS AHMAD REGISTRATION NO: FA10-BBA-043, 048, 035 DATED: 26/9/2012 TOPIC: IMPORTANCE OF RISK AND RETURN IN FINANCIAL MARKETS RISK: In normal terms; Risk is the potential that a chosen action or activity (including the choice of inaction) will lead to a loss (an undesirable
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finance, risk is defined as the likelihood that we will receive a return on an investment that is different from the return we expect to make. There is a trade-off between risk and expected return. Risk in investment has to be viewed in the marginal investors’ perspectives who set the stock prices. ↕ The objective in corporate finance is the maximization of firm value and stock price. Equity Risk and Expected Return Defining the risk In addition to the expected return of an investment
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CHARACTERIZING RISK AND RETURN Questions LG1 1. Why is the percentage return a more useful measure than the dollar return? The dollar return is most important relative to the amount invested. Thus, a $100 return is more impressive from a $1,000 investment than a $5,000 investment. The percentage return incorporates both the dollar return and the amount invested. Therefore, it is easier to compare percentage return across different investments. LG2 2. Characterize the historical return, risk
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exposure to risk factors, we assumed that: Rit+1=a+bi,1F1t+bi,2F2t+…+bi,nFnt+eit+1 First, we calculated z-score for logarithm of b_p and logarithm of cap to determine sensitivities for stock-specific factors. After we got all 13 sensitivities, we did a weighted regression of the 13 sensitivities against the 1000 stock’s forward return in 60 periods, respectively. For each period, we got 13 coefficients, which were the risk premiums for each risk factor. Finally, we regressed the risk premium
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Investment Management i) The term investment refers to funds invested in various securities — consisting of Government and semi Govt. securities, loans, debentures, shares and bonds etc. ❖ Elements of Investment :- a) Reward (Return) b) Risk and Return c) Time ❖ Nature of Investment :- Investment requires a continuous flow of decisions which can not be avoided. The investment decisions are based on many streams of data which taken together, represent to an investor
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