Please enable JavaScript.
Coggle requires JavaScript to display documents.
Chapter 3:RISK AND RETURN - Coggle Diagram
Chapter 3:RISK AND RETURN
Definition of investment
A current commitment for a period of time in order to derive future payments that will compensate for:
:star: the time that the funds are committed
:star: the expected rate of inflation
:star: uncertainty of future flow of funds
Types of income
:<3:Active income-wages, pensions, bonus
:<3: Passive income - real estates, income from tax investments
:<3: Portfolio income-shares, bonds. saving accounts, dividend, capital gains
Risk
:check: Uncertainty that an investment will earn its expected rate of return
:check: As a chance of monetary loss
:check: Probability is the likelihood of an outcome
Systematic Risk
:red_flag: Occurs outside of the company and beyond the financial manager beyond control
Unsystematic risk
:red_flag: Occurs inside the company within financial manager control
:red_flag: Risk cannot be reduced or eliminated but can be reduced to some extend with proper mix of securities in portfolio investment.
Sources of risk
:!: Business risk-caused due to the mismanagement of the company assets
:!: Financial risk-Caused by the improper financing mix used by the company to finance its investment
:!: Liquidity risk-Not being able to convert the asset into cash at short notice without losng value
:!: Exchange rate risk-Affect the investors return when converting an investment back into the "home" currency
:!: Country risk-Political risk is uncertainty of returns caused by the possibility of major change in the political or economic environment in country
Return
:fire: The reward of investing
:fire: It consist of a periodic cash payment(interest, dividend) or current income
Classification of return
: :<3: Rate of return-can earn from investing in the various types of assets
:<3: Expected return-Investing in a particular investment over a period
:<3: Realized return-Actual return. It can be more or less from expected return
:<3: Required return minimum rate of return required by investors to compensate to taking a level of risk
Measure of return
:warning: Expected return = (Ending value – Beginning value) + income/ Beginning value
:warning: Rate of return= (real rate of return + Expected inflation) + Risk premium
:warning: HPR= Ending value of investment/Beginning value of investment