prashant final assignment.docx - BUS503EA Financial Management Final-Exam Professor Youngho Lee Student name Billal BAKHTI Student ID 22772 Spring 2019

prashant final assignment.docx - BUS503EA Financial...

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BUS503EA Financial Management Final-Exam Professor : Youngho Lee Student name: Billal BAKHTI Student ID: 22772 Spring 2019 1
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Chapter 8 Risk and Rates of Return Key terms a. Risk: Risk is a situation involving exposure to danger . The value can be either gained or lost while taking a risk which is determined at the end results. Stand-alone risk: It refers to the involvement if single unit or company of the company. The specific assets are held for holding the risk in single section of the company as a consequence of risk measurement. Probability distribution: It’s the listing of distribution of possible outcomes or events of a probability assigned to each outcomes for a given outcomes. b. Expected rate of return: Expected return is the amount one would anticipate receiving on an investment that has various known or expected rates of return. It is calculated by taking the average of the probability distribution of all possible returns c. Standard deviation: The standard deviation can be defined as the measure of how far the actual return is likely to deviate from the expected return or the statistical measure of the variability of a set of observation. Coefficient of variance (CV): The coefficient of variance shows the measure of risk per unit of return and also provides a more meaningful risk measure when the expected returns on two alternatives are not the same. d. Risk Aversion: Risk aversion is the behaviors of consumers and investors, when exposed to uncertainty they attempt to reduce such type of uncertainty. A risk averse investor is an investor who prefers lower returns with known risks rather than higher returns with unknown risks Risk Premium: The difference between the expected return on a security or portfolio and the riskless rate of interest (the certain return on a riskless security) is often termed its risk premium. Realized rate of return: It is a rate of return that the investors actually realizes form the assets. Most of the time the real rate of return turns out to be the realized rate of return. 2
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e. Risk premium for Stock, i: Also referred to as simply equity premium, is the excess return that investing in the stock market provides over a risk-free rate, such as the return from government treasury bonds. This excess return compensates investors for taking on the relatively higher risk of equity investing. Market risk premium: The difference between the expected rate of return on market portfolio and the risk-free rate is Market risk premium. It is the incremental return demanded by investors on stocks, above that of risk-free investments. f. Expected rate on a portfolio: A portfolio's expected return is the sum of the weighted average of each asset's expected return. To calculate the expected return of a portfolio, we need to know the expected return and weight of each asset in a portfolio.
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