FIN3244 TEST 2 study guide

# FIN3244 TEST 2 study guide - 1. Identify Expected Rate of...

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1. Identify Expected Rate of Return & Standard Deviation as to Risk: pg. 147 Expected Return: The return an investor thinks an investment will earn in the future. Determines how much you should be willing to pay for it. Standard Deviation: A statistic used to measure the dispersion (variation) of returns around an asset’s average or expected return. Absolute measure of risk Provides quantitative tool for comparing investment risk Higher the standard deviation, the higher the risk Based on historical data Coefficient of Variation: a statistic used to measure the relative dispersion of an asset’s returns; it is useful in comparing the risk of assets with differing average or expected returns The higher the coefficient of variation, the higher the risk 2. Risk Factors that Rise/Lower Risk pg. 169 An acceptable level of risk: Risk-Indifferent: an investor who does not require a change in return as compensation for greater risk Risk-Averse: an investor who requires a greater return in exchange for greater risk.

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Risk-seeking: an investor who will accept a lower return in exchange for greater risk. 3. Calculate Total Return: pg. 145 Total Return: The sum of the current income a nd the capital gain (or loss) earned on an investment over a specified period of time. Use percent’s Current Income: Usually cash or near-cash that is periodically received as a result of owning an investment 4. Holding Period: The period of time over which one wishes to measure the return on an investment vehicle. Used for short-term investments. Captures both periodic benefits and changes in value. 5. Calculate Future Value: pg. 186 Future Value: The amount to which a current deposit will grow over a period of time when it is placed in an account paying compound interest *The higher the interest rate, the greater the future value 6. Risk Measures (impact) on Return: pg. 151 Required Return: The rate of return an investor must earn on an investment to be fully compensated for its risk. Consists of:
Real Rate of Return: The rate of return that could be earned in a perfect world where all outcomes are known and certain-where there is no risk. Expected Inflation Premium: The average rate of inflation expected in the future. Risk Premium: A return premium that reflects the issue and issuer characteristics associated with a given investment vehicle. *The required return can be found by adding to the risk free rate, a risk premium 7. Types of Risk that Pertain to an Investment: pg. 161 Business Risk: the degree of uncertainty associated with an investment’s earnings and the investments ability to pay the returns owed investors.

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## This note was uploaded on 03/21/2012 for the course FIN 3244 taught by Professor Unknown during the Spring '08 term at FSU.

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FIN3244 TEST 2 study guide - 1. Identify Expected Rate of...

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