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Unformatted text preview: UNIVERSITY OF ILLINOIS College of Business - Department of Finance - Finance 300 (Financial Markets) Professor James Jackson Individuals (Risk-Averse; Return Maximizing) In economics, the role or purpose of the individual is to maximize utility. In finance, we consider utility to be determined by a process of maximizing returns, while minimizing risk. So, the first part of the decision-making process is to calculate the return on investment. Basic return on investment (ROI) is the ratio of the profit relative to the initial cost of the investment, ROI = P t+1 – P t / P t where P t equals the initial market price, or the price at which the investor has purchased the asset, and P t+1 equals the final market price, or the price at which the investor has sold the asset. So, if an investor buys a given quantity of stock for $100 per share, and then later sells the stock for $110 per share, then the ROI equals ROI = $110 – $100 / $100 = 10.00%....
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