S07 chap 4-5 - Lecture No.4-5 Chapter 4 Contemporary...

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   Contemporary Engineering Economics, 4 th   edition,  ©  2007 Investing in Financial Assets  Lecture No.4-5 Chapter 4 Contemporary Engineering Economics Copyright © 2006
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   Contemporary Engineering Economics, 4 th   edition,  ©  2007 A. Investment Basics Liquidity – How accessible is your money? Risk – What is the safety involved? Return – How much profit will you be able to expect from your investment?
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   Contemporary Engineering Economics, 4 th   edition,  ©  2007 Real Return 2% Inflation 4% Risk premium 0% Total expected return 6% Real Return 2% Inflation 4% Risk premium 20% Total expected return 26% How to Determine Your Expected Return Risk-free real return Inflation Risk premium U.S. Treasury Bills Google.com Very safe Very risky
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   Contemporary Engineering Economics, 4 th   edition,  ©  2007 Figuring Average Versus Compound Return F i i = + + + = + = = ( . )( . )( . ) . ( ) . . 1 0 05 1 010 1 012 12936 1 12936 8 96% 3 i = + + = 5% 10% 12% 3 9% Period Return Year 1 5% Year 2 10% Year 3 12% 0 1 2 3 5% 10% 12% Average rate of return Compound Rate of Return
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   Contemporary Engineering Economics, 4 th   edition,  ©  2007 Compound Versus Average Rate of Return Investment Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Average return 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% Balance at the end of year 3 $1,295 $1,294 $1,284 $1,270 $1,264 $1,224 Compound return 9.00% 8.96% 8.69% 8.29% 8.13% 6.96% Annual Investment Yield (Base investment of $1,000) Investment Case 1 Case 2 Case 3 Case 4 Case 5 Case 6 Year 1 9% 5% 0% 0% -1% -5% Year 2 9% 10% 7% 0% -1% -8% Year 3 9% 12% 20% 27% 29% 40%
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   Contemporary Engineering Economics, 4 th   edition,  ©  2007  How to Determine Expected Financial Risk Risk : the chance that some unfavorable event will occur. Volatility measures the deviation from the expected value, or sudden swings in value—from high to low, or the reverse.
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