Chapter 11

Chapter 11 - CHAPTER 11 Introduction to Risk, Return, and...

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CHAPTER 11 Introduction to Risk, Return, and the Opportunity Cost of Capital
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Topics Covered Types of Financial Risks Rates of Return: A Review A Century of Capital Market History Measuring Risk Thinking About Risk
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Types of Financial Risks Three Major types of risk: Operational risk : The risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events; Credit risk : The risk of losses due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both); Market risk : The risk that the value of an investment will decrease due to movements in market prices or volatilities.
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Market Risk There are four standard market risk: Equity risk : The risk that stock prices will change. Interest rate risk: The risk that interest rates will change. Currency risk: The risk that foreign exchange rates will change. Commodity risk: The risk that commodity prices (e.g. gold, soybean, crude oil) will change. Liquidity risk: The risk that a given security or asset cannot be traded quickly enough in the market to prevent a loss (or make the required profit).
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Rates of Return 27.33% or .2733 = 65.50 80 . 1 10 . 16 = Return Percentage + Percentage Return = Capital Gain + Dividend Initial Share Price Example : Price at the beginnig of the investment is $65.50 per share Price at the end of the investment is $81.60 per share Dividend paid during the investment period $1.80 per share
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This note was uploaded on 12/07/2010 for the course FIN 331 taught by Professor Markmcdaniel during the Spring '10 term at Shawnee.

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Chapter 11 - CHAPTER 11 Introduction to Risk, Return, and...

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