Financial Markets Exam Two Study Guide

Financial Markets Exam Two Study Guide - Financial Markets...

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Financial Markets Exam Two Study Guide Bullet Points 25 Multiple Choice Questions on the exam 30 Review Bullet Points FIN 3244-02 Indentify Expected Rates of Return and standard deviation AS TO RISK . Standard Deviation : An absolute measure of risk. It measures the variation of returns around the investments expected returns. The standard deviation can be used as a quantitative tool when comparing the risk associated with different investments. The greater the standard deviation of the investment from its expected return, the riskier the investment is because it is more volatile! Risk Factors That Rise/Lower Risk . Fluctuating currency exchange rates increase risk. The amount of debt an issuer is wrapped up in increases risk. Uncertainty increases risk. Fluctuating market interest rate levels increase risk. A thinly trading market increases liquidity risk because you might not be able to sell your securities at a reasonable price. Calculate Total Return The total return is calculated by combining the capital gain or loss with the current income generated by the investment. You also add or subtract in the changes in currency exchange rates when dealing with foreign investments. Example : You have a capital gain of $500 after selling some stock. During the time you owned that stock you received $100 in dividends. Your total return would be $600. (500+ 100) Current income : Cash that is periodically received as a result of being the owner of a specific investment. This can take the form of dividends or interest. Uses For Holding Period Returns and Required Return Required Returns : The rate of return that completely compensates for the risk associated with an investment. The greater the risk, the greater the required return the investor will want for taking on that risk. Holding Period Return : The total return earned from holding an investment for a certain period of time. Usually used for a holding period of one year or less. This is a good way of comparing multiple investments of different sizes to see which ones will provide you with the best return over a specified period of time. Be sure to use investments with the same holding period when comparing to get the best results. The biggest downfall of the holding period return is that it fails to take into consideration the time value of money! Equation : Holding Period Return= Current income during the period + Capital gain or loss during the period/ Beginning investment value. Calculate future value Enter each given value into your financial calculator and then hit compute followed by the value key you are looking for. An example of this is shown at the bottom of page 155 in the text book.
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Risk Measures (Impact) on Return The greater the risk tied to an investment, the greater the required return would have to be to gain an investor’s interest. Types of Risk That Pertain to an Investment
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Financial Markets Exam Two Study Guide - Financial Markets...

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