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investment chapter 4.0 (Sources of risk (Risk-Return Tradeoff (is the…
investment chapter 4.0
the concept of return
return
The level of profit from an investment, or
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total return
the sum of the income and the capital gain (or loss) earned on an investment over a specified period of time
why return is important
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Expected Return
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Determines what an investor is willing to pay for an investment or if they are willing to make an investment
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Sources of risk
Risk-Return Tradeoff
is the relationship between risk and return, in which investments with more risk should provide higher returns, and vice versa
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business risk
is the degree of uncertainty associated with an investment’s earnings and the investment’s ability to pay the returns owed to investors.
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Financial Risk
is the degree of uncertainty of payment resulting from a firm’s mix of debt and equity; the larger the proportion of debt financing, the greater this risk.
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Purchasing Power Risk
is the chance that changing price levels (inflation or deflation) will adversely affect investment returns.
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tax risk
Risk is the chance that Congress will make unfavorable changes in tax laws, driving down the after-tax returns and market values of certain investments.
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event risk
comes from an unexpected event that has a significant and unusually immediate effect on the underlying value of an investment.
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market risk
is the risk of decline in investment returns because of market factors independent of the given investment.
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Currency Exchange Risk
is the risk caused by the varying exchange rates between the currencies of two countries. (Discussed in Chapter 2)
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steps in the decisions
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Assess the risk of the investment by looking at historical/projected returns using standard deviation or coefficient of variation of returns
Assess the risk of the investment by looking at historical/projected returns using standard deviation or coefficient of variation of returns
Select the investments that offer the highest expected returns associated with the level of risk you are willing to accept