Implicit in a project what action are we going to

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implicit in a project What action are we going to take if a certain metric is reached/crossed Option to expand a project with positive NPV Option to abandon/scale-back a project with negative cash flows and profit Option to wait/postponed Strategic Options: Options for future, related business products or strategies Chapter 12: Lessons from Capital Market History Simply, the required return depends on the level of risk with the investment. Higher risk demands a higher required return Two components of total return on investment: (1) Income component such as cash payments, (2) capital gain/loss in value of asset Total dollar return = Dividend Income + Capital Gains(or loss) Total Cash if investment is sold = Initial Investment + Total Dollar Return Percentage Return = (Dividends paid at end of period + Change in Market Value) / Beginning Market Value Capital Gains Yield is the change in price in the year, divided by beginning price Capital Gains Yield = (P t+1 - P t ) / P t Investment returns are often compared to what you would have earned if you help portfolios in indices and other comparables such as Canadian common stocks (S&P/TSX) - portfolio based on sample of largest companies Page 36 of 42
AMG US common stocks - 500 largest US companies in $USD TSX Venture stock - Small and emerging companies not meeting listings requirements for S&P/TSX Small stocks - small-cap Canadian stocks as combined by Nesbitt Burns Long Bonds - High-quality, long-term corporate, provincial and Gov. of Canada Canada Treasury Bills - Treasury bucks with three-month maturity Arithmetic mean return can be calculated by adding percentage values and dividing by number of periods “What was your return in an average year over a period” Risk Premium: Excess return required from an investment in a risky asset over a risk-free investment Average risk premium is the Arithmetic mean return subtracted by the Arithmetic average return of a “risk-free” investment, such as Treasury Bills. Treasury bills have no credit default risk, and not subject to interest rate risk since they are 3-month terms. Volatility of the markets is examines using variance and standard deviation Variance: Average squared deviation between the actual return and average return Standard Deviation: Positive square root of variance To compute variance, find the difference between actual and average return for each time period, square them, and sum the squares, divide by (n-1) Normal distribution: Symmetric, bell-shaped distribution that can be defined by its mean and standard deviation Value at risk (VaR): Statistical measure of maximum loss based on based on 97.5% of the normal distribution. However, VaR likely underestimates the amount of capital needed because it is based on assuming a normal distribution of returns Lessons from capital market history: (1) Stocks have significant risk, (2) diversification can help reduce risk Page 37 of 42
AMG Geometric average return: Average compound return earned per year over a multiyear period

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