The growth rate can be calculated using an excel spreadsheet.
The spreadsheet equation calculates the annu alized rate of change from the first dividend paid in 2005 to the last one in 2014.
Explain how the following terms are used to find the risk-free rate of return and required rate of return for an investment.
The return on an investment is our primary concern so far.
We can't consider return without also looking at risk.
The risk associated with an investment is related to the expected return.
The higher the investment's risk, the higher the expected return it must offer.
Higher returns can be provided by riskier investments.
In Gen eral, investors want to get the highest possible return for the amount of risk they are willing to take.
We begin by looking at the key sources of risk.
There are many different sources of risk associated with an investment.
The major sources of risk are considered by a pru dent investor.
You can find the required return on an investment if you add the risk premium to the risk-free rate.
The sources of risk derive from the characteristics of the investment and the entity issuing the investment.
If the firm's earnings are not enough to meet obligations, business owners may not receive a return.
Debt holders are likely to get some of the amount owed them because of preferential treatment.
The firm's industry is tied to the business risk associated with an investment.
Similar kinds of firms have the same business risk, but differences in costs, location, and man agement can cause different levels of risk.
Firms can raise money by issuing common stock to investors and by borrowing money.
When firms borrow money, they commit themselves to make future interest and principal payments, and those payments are not linked to a firm's profits, but are instead fixed according to a contract between the firm and its lender.
When business conditions are good and profits are high, shareholders benefit from the use of debt because payments to lenders do not rise with profits, leaving more for shareholders.
When business conditions are good, a firm that uses debt will generate more profits for its shareholders than a firm that doesn't.
Firms have to repay their debts even if they aren't making a profit.
Debt magnifies the losses that shareholders must endure, so in bad times a firm that uses debt will experience more losses than a firm that has no debt.
Debt magnifies a firm's business risk if it has higher profits in good times and larger losses in bad times.
Firms in all industries are subject to the ups and downs that we refer to as business risk, but firms that use debt take even more risk.
The financial risk of a firm is increased by the amount of debt used to finance it.
There is a chance that an unexpected increase in make interest payments that do prices will reduce purchasing power, the goods and services that don't change once the bonds are can be purchased with a dollar.
They are among the investments that are most vulnerable to purchasing power risk.
Those that provide fixed returns have high purchasing power risk, but they also sell bonds that are more profitable during periods of low inflation or declining prices.
The returns on stocks of durable-goods manufacturers tend to move with the general price level.
The bonds do not rise in the short run because of the interest payments.
Securities are affected by interest rate risk.
The purchasing power of those securities that offer a fixed periodic of their investments is protected.
The value of a security is affected by important conceptual tools.
The general relationship between supply and demand for money is what causes the interest rate to change.
The prices of securities change as interest rates go up or down.
When interest rates rise, the prices of bonds and preferred stock go down.
New securities become available in the market as interest rates go up.
Securities that are already outstanding make cash pay ments that reflect lower market rates from the past, so they are not competitive in the higher rate environment.
Their prices fall when investors sell them.
When interest rates fall, the opposite occurs.
The prices of outstanding securities that make cash payments are more attractive.
There is a second aspect of interest rate risk.
When interest rates go up, bond prices go down, but bondholders have the chance to take advantage of a new, higher rate.
The compound rate of return that investors earn on their bonds is boosted by this opportunity.
Income reinvested at the new higher interest rate partially offsets the effect of a rise in interest rates on bond returns.
The offsetting effect is larger for bonds that make higher interest payments, and it is completely absent for zero-coupon bonds.
Investments in short-term securities such as U.S. Treasury bills and certificates of deposit are related to interest rate risk.
When short-term securities mature, investors face the risk of having to invest the proceeds in lower-yielding, new short-term securities.
If you make a long-term investment, you can lock in a return for a period of years rather than face the risk of falling short-term interest rates.
The returns from investing in short term securities are adversely affected when interest rates decline.
The interest rate risk of a strategy of investing in short-term securities is dependent on the chance that interest rates will decline.
Investments are subject to interest rate risk.
Fixed-income securities are the most directly affected by interest rate moves, but they also affect other long-term investments such as common stock and mutual funds.
The higher the interest rate, the lower the value of the investment.
One can cut the price of an investment.
Liquid investments can be sold quickly without having an adverse impact on the price.
A security recently purchased for $1,000 would not be viewed as highly liquid if it could be quickly sold for $500.
An investment's liquidity is important.
Investments traded in thin markets tend to be less liquid than those traded in broad markets.
Large companies and bonds issued by the U.S. Treasury are generally liquid assets.
The tax risk is higher if the changes will drive down the after-tax returns and market values of certain investments.
Favorable changes in tax laws include elimination of tax exemptions, limitation of deductions, and increases in tax rates.
The new tax on investment income went into effect as part of theAffordable Care Act.
Some high-income taxpayers have to pay an additional 3.8% tax on their net investment income.
Business and financial risk are not the only event risk.
It doesn't mean that the market is doing poorly.
The underlying value of an investment is usually affected by an unexpected event.
The death of the president of American Express was an example of event risk.
The market value of American Express stock fell by $400 million on the day he died.
All types of investments can be affected by event risk.
Its impact is usually isolated in most cases.
Pur chasing power risk, interest rate risk, and tax risk are some of the different risks that market risk embodies.
The impact of market factors on investment returns is not uniform.
A rapid economic boom would likely increase the value of companies that produce luxury goods, while it might have a less positive effect on companies like Walmart and Dollar General that focus on selling goods at bargain prices.
Market risk is reflected in a stock's sensitivity.
If a stock moves up or down sharply when the market moves, it has a high degree of market risk.
At some point in their lives, most people ask themselves how risky a course of action is.
The answer is usually subjective.
Risk is quantified in finance because it improves comparisons between investments and enhances decision making.
The risk of single assets and portfo lios of assets can be measured using statistical concepts.
We show how the concept of standard deviation can be used to understand an investment's risk.
Portfolios of assets will be considered later.
It shows the dispersion of returns around an asset's average or expected return.
There are two competing investments-- shares of stock in Target Corporation and American Eagle Outfitters, Inc. Target earned an average return of 7.7% from 2005 to 2015, but American Eagle Outfitters achieved a superior average return of 12.4%.
You can see that American Eagle returns ranged from -53.5% to 105.8%), while Target returns ranged from -20.0% to 42.5%).
The standard deviation can be used to compare investment risk.
The table shows the standard deviation calculations for Target and American Eagle.
The standard deviation for the returns on Target is 21.5%, which is less than the standard deviation for American Eagle Outfitters.
The fact that American Eagle Outfitters stock returns over a wide range shows that it is more volatile than Target.
The figures are based on historical data.
There is no guarantee that the risks of these two investments will stay the same in the future.
I describe standard deviation to my than bonds and bonds earn higher returns than bills.
The annual rate of return is determined by the end-of-year closing prices.
There are higher standard deviations.
Market participants need higher returns to compensate for greater risk.
It's useful to quantify the risk of an investment.
If you don't know your feelings toward risk, they will be meaningless.
The general risk-return characteristics of alternative investments and the question of an acceptable level of risk will shed light on how to evaluate risk.
Specific investments can vary greatly in terms of their risk and return characteristics.
Some common stocks have low returns and high risk, while others have high returns and high risk.
Once you have chosen the type of investment, you must decide which security to get.
The amount of risk that individuals are willing to bear and the return that they require as compensation for that risk is different.
Real estate expects a higher return and deposit.
The risk for investors with different preferences is shown in the figure.
Different, risk-averse, and risk-seeking investors are the three categories.
These investors need higher expected returns to compensate for taking more risk.
Seeking a risk increase.
The majority of investors don't like risk.
The second part deals with conceptual tools that increase returns.
The fact that most investors are risk averse means riskier investments must offer higher returns to attract buyers.
The investor's degree of risk aversion affects the answer to that question.
The green line in Figure 4.3 is steep for a very risk-averse investor because they need a lot of compensation to take on additional risk.
The green line is flatter for someone who is less risk averse because they don't need as much compensation to accept risk.
Is it nature, following steps to combine return and risk?
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