Chapter_6_-_The_Returns_and_Risk_from_Investments

Chapter_6_-_The_Returns_and_Risk_from_Investments - The...

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he Returns and Risks The Returns and Risks rom Investing From Investing Chapter 6 Charles P. Jones, Investments: Analysis and Management, Tenth Edition, John Wiley & Sons 6-1
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Asset Valuation unction of both return and risk ± Function of both return and risk ¾ At the center of security analysis ow should realized return and risk be ± How should realized return and risk be measured? he realized risk- turn tradeoff is based on ¾ The realized risk return tradeoff is based on the past ¾ The expected risk-return tradeoff is uncertain and may not occur 6-2
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Return Components eturns consist of two elements: ± Returns consist of two elements: ¾ Periodic cash flows such as interest or dividends (income return) ± “Yield” measures relate income return to a price for the security ¾ Price appreciation or depreciation (capital gain or loss) he change in price of the asset ± The change in price of the asset ± Total Return =Yield +Price Change 6-3
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What is risk? isk is the chance that the actual ± Risk is the chance that the actual outcome from an investment will differ om the expected outcome. from the expected outcome. ± Risk is often associated with the ispersion in the likely outcomes. dispersion in the likely outcomes. ¾ Dispersion refers to variability, and the standard deviation is a statistical measure of variability or dispersion. 6-4
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Risk Sources inancial Risk terest Rate Risk ± Financial Risk ¾ Tied to debt financing ± Liquidity Risk ± Interest Rate Risk ¾ Affects income return ± Market Risk qy ¾ Marketability with-out sale prices ¾ Overall market effects ± Inflation Risk ± Exchange Rate Risk ± Country Risk olitical stability ¾ Purchasing power variability usiness Risk ¾ Political stability ± Business Risk 6-5
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Risk Types ± Two general types: ystematic (general) risk ¾ Systematic (general) risk ± Pervasive, affecting all securities, cannot be avoided ± Interest rate, market, inflation, exchange and country risks onsystematic or idiosyncratic (company ¾ Nonsystematic or idiosyncratic specific) risk ± Unique characteristics specific to issuer qp ± Business, financial, liquidity risks 6-6 ± Total Risk = Systematic Risk + Idiosyncratic risk
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Chapter_6_-_The_Returns_and_Risk_from_Investments - The...

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