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FIN 620-session 1 lecture

FIN 620-session 1 lecture - FIN 620 Long Term Financial...

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FIN 620 Long Term Financial Management Session 1 1. Lecture Notes/Comments In Chapter 10 we explore risk and return in the context of lessons from market history. The performance of an investment (a certain amount of money invested) is judged by the amount of money it returns, or equivalently the return on the investment. In this Session we will study measures of return, and also the historical returns generated by assets of different classes (types). The difference in returns between different assets is explained by the risk return tradeoff made by investors. . Many (particularly beginning) inestors feel that if you do not sell a security, you will not have to consider the capital gain or loss involved. (This is a common investor mistake – holding a loser too long because of reluctance to admit a bad decision was made.). In fact, non-recognition is relevant for tax purposes – only realized income must be reported. However, whether or not you have liquidated the asset is irrelevant when measuring a security’s pre-tax performance. Security returns are examples of random variables – categories of numbers for which in any particular instance more things can happen than will happen – and the things that can happen have an associated probability of occurrence. Random variables are typically characterized by their probability distributions (i.e., a graph, a table, or function that relates the potential values of the random variable to its associated probabilities) along
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