R&R_Eak - 1 Risk and Return Risk and Return 2 Risk...

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1 Risk and Return Risk and Return
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2 Risk and Return Objectives Objectives 1. Compute the annualized simple interest return 2. Calculate the expected return on a single asset 3. Figure the standard deviation of returns to a single asset 4. Determine the expected return for a portfolio of assets 5. Calculate the required return for a portfolio of assets 6. Discuss the meaning of beta
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3 Risk and Return Savings vs Investment Savings vs Investment Putting aside a portion of income for future financial needs. Primary aim is to preserve capital so that you have the money when the need arises. Risking the amount saved to earn profits. These profits are commonly referred to as returns. These returns are derived from capital gains or/and income (cash flows)
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4 Risk and Return Risk–Return Relationship Risk–Return Relationship If you need $10,000 five years from now what should you do? 1. Save money in a bank that pays 5% monthly compounding - $147/mth 2. Unit Trust that pays, on average, 12% - $122 ( $25 less than #1) 3. Small Cap stocks that pays, on average 17% - $107 4. Your stockbroker tells you that a stock have been paying 25% for the last 2 years - $85/mth Now, which option should you choose? To earn a higher return, you have incur higher risk.
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5 Risk and Return FIGURE 1 Risk–Return Relationship
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6 Risk and Return Risk–Return Relationship Risk–Return Relationship Investors study an asset's characteristics and develop expectations regarding the likelihood of the cash flows being as projected. The less certain we are about the projected cash flows, the riskier will be the asset. Why uncertain? Uncertainties arises from factors that are difficult to predict and will influence the firm’s future. It's also hard to predict the probability and length of a foreign country's recession.
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7 Risk and Return Risk–Return Relationship Risk–Return Relationship The point is that risk is determined by the uncertainty of future cash flows, and this uncertainty is the result of factors peculiar to each asset . Once investors establish the riskiness of the asset, the market allows the price of the asset to adjust so the expected return on the asset fairly compensates investors for their perceived risk. The perceived risk of the asset is determined first, and then the market establishes the price that will provide an expected return sufficient to induce investors to buy the asset .
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8 Risk and Return Computing simple returns Computing simple returns
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9 Risk and Return Computing simple returns Computing simple returns Suppose you bought 100 Wah Seong shares at $5.05 per share. A year later you want to evaluate your investment. Current price is $6.10. You remember you were paid $0.07
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This note was uploaded on 12/12/2011 for the course ECONOMICS 101 taught by Professor Thoman during the Spring '09 term at Abu Dhabi University.

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R&R_Eak - 1 Risk and Return Risk and Return 2 Risk...

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