[Solved] 1.) Describe the two components of return. 2.) What are the key... (2024)

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1.) Describe the two components of return.

2.) What are the key factors that affect the level of return? Briefly explain.

3.) Briefly describe the holding period return and yield, and explain the when it is appropriate to use yield instead of holding period return.

4.) Define and discuss the sources of risk.

5.) Define standard deviation and explain how standard deviation is used in making investment decisions.

6.) What are the three basic risk preferences? Briefly explain each risk preference.

7.) Describe the steps involved in investment decision process.

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Greetings, I'm an enthusiast with a robust understanding of finance and investment concepts, backed by practical experience and knowledge. My expertise extends to the intricate details of return components, factors influencing returns, holding period return, yield, risk sources, standard deviation, and various risk preferences.

Two Components of Return: Return is comprised of two components - capital gain and income. Capital gain is the change in the value of an investment over time, while income refers to the periodic cash flows generated, such as dividends or interest.
Key Factors Affecting Return: Several factors impact the level of return, including market conditions, economic factors, interest rates, company performance, and geopolitical events. Diversification and asset allocation are also crucial in managing and enhancing returns.
Holding Period Return and Yield:
- Holding Period Return (HPR): It calculates the total return of an investment over a specific holding period, considering both capital appreciation and income.
- Yield: It represents the income generated by an investment as a percentage of its current market price. Yield is used when the focus is on generating income, and it is particularly relevant for income-oriented investors.
Sources of Risk:
- Market Risk: Arises from overall market movements.
- Credit Risk: Relates to the potential default of issuers.
- Liquidity Risk: Concerns the ease of buying or selling an investment.
- Interest Rate Risk: Arises due to changes in interest rates.
- Inflation Risk: The risk that inflation will erode the purchasing power of investments.
Standard Deviation: Standard deviation is a statistical measure of the dispersion of returns from their average. In investment, it quantifies the volatility or risk of an asset. Higher standard deviation implies greater volatility.
Three Basic Risk Preferences:
- Risk-Averse: Investors who prefer lower-risk, lower-return investments.
- Risk-Neutral: Investors who are indifferent to risk and make decisions solely based on returns.
- Risk-Seeking: Investors who are willing to take on higher risk for the potential of higher returns.
Steps in Investment Decision Process:
- Setting Objectives: Define investment goals and constraints.
- Developing Investment Policy: Establish guidelines for portfolio construction.
- Asset Allocation: Distribute investments among different asset classes.
- Security Selection: Choose specific securities or assets within each class.
- Portfolio Construction: Combine selected securities to create a diversified portfolio.
- Monitoring and Rebalancing: Regularly review and adjust the portfolio based on changing market conditions.

Feel free to delve deeper into any specific area, and I'd be happy to provide further insights or clarifications.

FAQs

[Solved] 1.) Describe the two components of return. 2.) What are the key...? ›

Income can provide a steady stream of returns for investors, while capital appreciation represents the potential for significant returns over the long term. Together, capital appreciation and income make up the total return on investment.

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What are the two components of the total return? ›

Total return accounts for two categories of return: income including interest paid by fixed-income investments, distributions, or dividends and capital appreciation, representing the change in the market price of an asset.

What are the components of return on investment ROI? ›

Return on investment (ROI) is an approximate measure of an investment's profitability. ROI is calculated by subtracting the initial cost of the investment from its final value, then dividing this new number by the cost of the investment, and finally, multiplying it by 100. ROI has a wide range of uses.

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What are the 2 ways to make a return from a share? ›

Capital appreciation (the stock price rising in value), and dividends are the two ways you can earn a return as a shareholder.

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What 2 factors can cause an investor's required rate of return to change? ›

The required rate of return is based on the market's perceived risk for any individual security. This perceived risk has two risk components – business risk and financial risk.

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What is an example of return? ›

Examples of return in a Sentence

I have to return a book to the library. I'm returning your ladder. Thanks for letting me borrow it. The dishes were broken when they were delivered, so I had to return them.

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What are the two components of total return in a common stock fund? ›

The total return on a share of stock has two components: the dividend yield and the capital gains yield. The value of a share of common stock equals the present value of future.............. plus the present value of the future ....................

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What are the components of total return on a bond fund? ›

A bond's total return consists of three primary components: yield, roll-down and yield-curve changes.

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