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4 -- Part 4: Return and Risk

- There is a holding period.
- It is important that your estimate of an investment's recent study takes into account the time value of money.

- You can assess an investment's risk by determining the standard deviation of an investment's returns using one of the more sophisticated methods that we discuss elsewhere.

- Equal or economic forces can be provided by investments with lower levels of risk.
- If other investments with the same level of risk among individuals with higher provide higher returns, the investment is not acceptable according to the study.

- The investments that offer the highest returns associated with the level incomes and more debt you are willing to take should be chosen by individuals with more volatile lifestyles.
- If you get the highest expected return, you will be more risk averse.

- The most difficult step in the process is assessing risk.
- You will learn how to assess these other FAC pp.

- Discuss each of the sources of risk.

- Standard deviation is a measure of risk or variability.

- You should know what to know after reading this chapter.

- Return is calculated on a historical basis and used to project returns.
- The level of return is dependent on internal characteristics and external forces.
- There are significant differences in the average annual rates of return realized on different types of security investments.

- Money has a time value because investors can earn interest on their funds.
- When making investment decisions, time value of money should be considered.
- Time value of money calculations can be simplified with financial calculator and electronic spreadsheets.
- The present value of its benefits equals or exceeds the present value of its costs is what constitutes a satisfactory investment.

- The issuer's characteristics affect the risk premium.
- The holding period return is the return earned over a period of time.
- It can be used to compare returns earned in a short period of time.

- The investment is acceptable if the IRR is greater than the required return.
- The concept of IRR assumes that the investor will be able to earn interest on their investment.

- The rate of growth is the compound annual rate of change in the value of a stream of income.

- The combined impact of the sources of risk would be reflected in the investment's risk premium.

- Higher returns are required by investors for greater risk.
- For a given increase in risk, most investors require an increase in expected return.
- When selecting investments, investors estimate the return and risk of each alternative and then pick investments that offer the highest returns for the level of acceptable risk.

- Log into MyFinanceLab, take a chapter test, and get a personalized study plan that tells you which concepts you understand and which ones you need to review.
- MyFinanceLab will give you further practice, as well as videos, animations, and guided solutions.

- For at least five years, choose a publicly traded company that has been listed on the Egyptian Exchange.
- Use any data source to find the annual dividend paid by the company over the past five years.
- Find the closing price of the stock at the end of the previous five years.

- The return is calculated for the five one-year periods.

- The table shows a series of cash payments over the next four years for two investments.

- Data on expected inflation and the current yield interest on short-term government bonds are used to Evaluate this prediction.

- Keep a record of their dividends and close their prices each week over the next six weeks.

- For each of the six weeks, calculate the one-week HPRs for each stock.

- An investor buys a bond.
- The bond pays interest every six months.

- If you purchased a share of stock for $50 one year ago, sold it today for $60, and received three dividends totaling $2.70, you should be able to calculate the following.

- The accompanying table has historical data for an investment.

- For each year, calculate the total return.

- If you want to know the level of return in the next two years, you should indicate it.

- The risk-free rate is 4.8%.

- The following two investment alternatives have a one-year holding period return.

- You are looking at two investment options.
- If you sell the stock in six months, you'll make $24 per share.
- You should sell the stock in one year for $30 because it pays dividends of $0.50 per share and is trading at $27 per share.

- The annual interest on the bond is $50 per $1,000 of par value.
- You will collect the par value and interest at the end of the bond's one year maturity.

- If you invest $4,000 today, you will get a return of $9,000 in 10 years.

- The Egyptian Exchange has an investor named Josef Samir.
- He gets dividends of 75, 76, and 76 over the next four years after investing 5,000 Egyptian pounds in a cement company.
- He sells the stock at the end of the four years.

- Your friend wants you to invest $10,000 in a business.
- You would receive nothing for three years, at the end of year four you would receive $4,900, and at the end of year five you would get $14,500.

- Use a financial calculator or an excel spreadsheet to estimate the IRR for each investment.

- Rania must earn a 12% return on an investment that requires an initial outlay of $2,000 and promises to return $6,000 in eight years.

- You can estimate the IRR on this investment.

- To estimate the IRR for each of the investments, use a financial calculator or an excel spreadsheet.

- You can estimate the IRR on this investment.

- An investment that creates the following income stream can be purchased at the beginning of the year for $1,000 and sold at the end of the year for $1,200.
- You can estimate the IRR for this investment.

- Estimate the compound annual rate of growth between the earliest year for which a value is given and the next for each of the following streams of dividends.

- A company paid a dividend of $1.50 per share in 2009, and will pay a dividend of $2.75 in 2016 Estimate the growth rate of the dividends.

- The company had net income of $350 million.
- The company expects net income to go up in 2016 Estimate the compound growth rate of net income.

- The historical returns for A and B are summarized in the table.
- The data can be used to answer the questions.

- A teacher at a high school received a tax refund of $1,100 after making a decision.
- Dave decided to make a long-term investment because he didn't need this money for his current living expenses.
- Dave isolated two investments that were most suitable to his needs after surveying a number of alternative investments.

- The investments were expected to provide income over a 10-year period.
- Investment A gave a certain amount of income.
- Dave wasn't sure of the income provided by investment B. Dave was able to find a 4% discount rate for a relatively certain investment.
- He estimated that an investment like B would have to provide a return at least 4% higher than investment A because he was a bit uneasy with it.
- Dave wanted to keep the extra $50 invested for the full 10 years in a savings account, even though he planned to invest it in other vehicles.

- As he makes his investment decision, Dave has asked for your help in answering the questions that follow the expected return data for these investments.

- If you know that investment B is riskier than investment A, you can apply a 8% discount rate to investment B.

- The present value technique can be used to estimate the IRR.

If Dave doesn't make any withdrawals from the savings account, how much money will have grown by the end of the year?

- Molly O'Rourke has slowly built a diversified portfolio of common stock over the past 10 years.
- Her portfolio includes 20 different common stock issues and has a total market value of $82,500.

- 50 shares of either of the two common stock issues are being considered by Molly.
- She has gathered data for both share price and dividends over the last 10 years to assess the risk and return of each issue.
- According to Molly's research, each issue will behave the same in the future as it has in the past.
- She believes that the average HPR over the past 10 years can be used to estimate the expected return.
- The data collected by Molly is given in the accompanying table.

- Determine the HPR for each stock over the course of a decade.
- Use the approach specified by Molly to find the expected return for each stock.

- Evaluate and discuss the return and risk associated with stocks X and Y.

- International Business Machines, Helmerich & Payne, Inc., and the S&P 500 Indexample are the specific securities to be researched.
- The following data is found by her.

- The S&P 500 Index includes dividends.

- To calculate the holding period return for each year and the average return over a five-year period, use the data that Laura has found on the three securities.

- The HPR will be based on five different one-year periods.

- The table shows the change in the average US home price over the course of a decade.
- The average return and standard deviation for Target Corporation and American Eagle Outfitters, Inc. are shown in Table 4.9.

- Imagine that at 25 you start making annual deposits of $1,000 into a savings account that pays 5% annual interest.
- You will have made $40,000 in deposits by the time you are 65.

- None of the above is the answer.
- The interest on the deposits earns interest over the course of 40 years.

- One of the most basic investments is a savings account.
- The saver gets interest for placing funds in an account.
- The saver will not experience a capital gain or a capital loss because the value of the initial deposit will only change by the amount of interest earned.
- The period's income is the interest earned by the saver.

- Each period of time it is invested, interest is paid only on the initial investment.
- If you made a $100 initial deposit in an account that paid 6% simple interest, you would earn $6 in interest each year that you left the money on deposit.
- After one year, your account balance would grow to $106, after two years it would grow to $112, and so on.
- The account value goes up each year because you only earn interest on the initial deposit.

- Savings institutions use this method.
- The rate of return on an investment increases when interest compounds more frequently.
- If you invest $100 in an account that earns 6 percent per year, you should assume that interest compounds once a year.
- Your account balance is the same after one year as it was before.
- In the second year, you earn $6.36 in interest and the account balance grows to $112.36.
- Interest payments increase year after year if all of the money is left on deposit.

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