Lecture7_Slides_6perpage

# Lecture7_Slides_6perpage - ADMINISTRATION FINS1613...

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1 FINS 1613 BUSINESS FINANCE Dr. Gloria Y. Tian School of Banking & Finance y.tian@unsw.edu.au ADMINISTRATION Lecturer (weeks 7-11) Dr. Gloria Y. Tian Contact email: y.tian@unsw.edu.au Cl t t i H ( k 7 11 Consultation Hours (weeks 7-11) Monday 3-5pm Office: room 309, ASB west wing Phone: 9385-5862 OVERVIEW: The World of Finance Lecture 07 3 OVERVIEW: The World of Finance 4 CAPITAL BUDGETING 5 R ISK & R ETURN RTBWJ Chapters 10

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2 RISK AND RETURN Lecture 07 7 CONTENTS Returns 1.1 Measures of return 1.2 Single-period return and multi-period return 1.3 Geometric average Risk and Return 2.1 Risk and return: Describing the past 2.2 Risk and return: Looking forward 2.3 Risk aversion and risk premium Market Efficiency 3.1 Capital markets and prices 3.2 Information and prices 3.3 Three forms of market efficiency 8 RETURNS ON INVESTMENT When an investment is made, there is the expectation that this investment will generate positive returns. There are two different ways of measuring the return generated by an investment over a holding period: 1. Dollar Return 2. Rate of Return (i.e. percentage return) 9 DOLLAR RETURN The dollar return is the difference between the amount you receive at the end of the investment and the amount initially invested. 10 Invested Amount ceived Re Amount turn Re Dollar DOLLAR RETURN: Example 11 DOLLAR RETURN: General Expression 12
3 RATE OF RETURN A more useful measure is the rate of return : Lecture 07 Invested Amount turn Re Dollar turn Re of Rate This holding period return (HPR) gives a percentage answer which is much easier to understand. 13 RATE OF RETURN: General Expression 14 RATE OF RETURN: Example 15 MULTI-PERIOD RETURNS Sometimes, investors hold an investment for multiple years, and prices moves over time. 16 MULTI-PERIOD RETURNS: Example 17 MULTI-PERIOD RETURNS: General Expression 18

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4 GEOMETRIC AVERAGE RETURN Lecture 07 Geometric average return is the constant per- period return that makes a hypothetical investment have the same total return as the actual investment. 19 GEOMETRIC AVERAGE RETURN: Example 20 RISK AND REUTRN: Describing the Past The historical realized rate of return is how much your investment actually made. Average annual return Th tdd di t i f h i til t The standard deviation of historical returns measures how much returns varied around the average return over the holding period.
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## This note was uploaded on 10/20/2011 for the course COMMERCE 3502 taught by Professor All during the One '11 term at University of New South Wales.

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Lecture7_Slides_6perpage - ADMINISTRATION FINS1613...

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