07%20risk%20and%20return

07%20risk%20and%20return - and return - 1 FNAN 301...

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Unformatted text preview: and return - 1 FNAN 301 Financial Management Risk and return and return - 2 Topics Covered Returns Annual returns Historical returns Nominal and real rates Variability of returns Expected returns, variances, and standard deviations Individual assets Portfolios Risk premiums Actual returns and expected returns Market efficiency Total, systematic, and unsystematic risk Risk and diversification Systematic risk Capital Asset Pricing Model Opportunity cost of capital and return - 3 Risk and Return: Overview The opportunity cost of capital for a project is the expected return on securities of equal risk as the project The risk-return trade-off People do not like risk, so they must be compensated for bearing risk in the form of a higher expected return We need to understand risk, returns, and their relationship to be able to determine the appropriate expected returns and discount rates for projects, investments, and other assets and return - 4 Rate of Return: Total Dollar Return The total dollar return over a period measures the change in wealth associated with a particular asset in dollar terms The total dollar return of an asset over a period equals the sum of two components • Cash flows from investment during period Examples: stock dividends and bond coupons • Change in value of investment during period Referred to as the capital gain Measured as ending value minus initial value Total dollar return = cash flows from investment + capital gain and return - 5 Rate of Return: Percentage Return The percentage return measures the change in wealth associated with a particular asset in percentage terms The percentage return of an asset over a given period equals the total dollar return over the period divided by the value of the asset at the start of the period Percentage return = total dollar return ÷ initial value = (cash flows from investment + capital gain) ÷ initial value = (cash flows from investment + ending value – initial value) ÷ initial value and return - 6 FNAN 301 Notes The terms “return” and “rate of return” refer to percentage return, not total dollar return and return - 7 Expected Rate of Return: Expected Total Dollar Return The expected total dollar return measures the expected change in wealth associated with a particular asset in dollar terms The expected total dollar return of an asset over a given period equals the sum of two components • Expected cash flows from investment during period Examples: expected stock dividends and expected bond coupons • Expected change in value of investment during period Referred to as the expected capital gain Measured as expected ending value minus expected initial value Expected total dollar return = expected cash flows from investment + expected capital gain and return - 8 Expected Rate of Return: Expected Percentage Return The expected percentage return measures the...
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This note was uploaded on 02/03/2011 for the course FINANCE 301 taught by Professor Murray during the Spring '09 term at George Mason.

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07%20risk%20and%20return - and return - 1 FNAN 301...

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