YU 3541, Fall 2008, Chapter #14(October 23, 2008)

YU 3541, Fall 2008, Chapter #14(October 23, 2008) - LECTURE...

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1 LECTURE #6-PERSONAL FINANCIAL PLANNING AGENDA 1. Chapter #14-Take up the Chapter Notes, multiple choice questions and problems.
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2 Chapter #14-Study Notes Basic Terms 1. Investments and Savings Savings-Simply the money that is left over after your consumption. Investing-Using the savings that you have and investing it in securities to earn investment income.
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3 Investment Terms Defined-Continued Basic Characteristics of an Investment See page 331. The most important characteristics that affect an investors investment decision are return and risk. Return on Investment-Total return includes income return and capital gains return. Rate of Return = P 1 - P 0 + D P 0 (See page 332 and Example 14.1). Expected Rate of Return = E(P 1 ) – P 0 + E(D) P 0 Review Example 14.2.
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4 Investment Risks RISK is the uncertainty about the rate of return that you will earn from an investment. Measuring risk by determining the variability in an investment’s rate of return. Investments with more variability in their rate of return are riskier than investments with less than variability. Measuring Risk -1. Standard Deviation. 2. Beta
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5 Risk/Return Tradeoff
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6 Investment Risks-Continued Total Risk of An Investment Total investment risk is defined as the standard deviation of its rate of return. Thus, the total risk measures the total variability or volatility of an investment. Objective vs. Subjective Probability Distributions-See Page 336.
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Investment Risk Factors 1. Variability of an Investments Rate of Return-The Risk-Free Asset- No variability in the rate of return and the standard deviation is zero. For example, Treasury bills (government guaranteed rate of return if held until maturity). However, these do not take inflation into account (inflation risk ) nor changes in the interest rate on maturity (reinvestment risk ). 2.
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YU 3541, Fall 2008, Chapter #14(October 23, 2008) - LECTURE...

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