Risk and return Flashcards
A Return
A return is the amount received by investor as A COMPENSATION for taking on the RISK of the investment.
Return of Investment - formula
= amount Received - amount Invested
an investor paid 100k for investment that returned 112k the investor return is ?
=112k-100k
the investor’s return is 12000
Rate of return - formula
return on investment / amount invested
Name the two basic types of INVESTMENT RISK
Systematic Risk also called market risk
Unsystematic Risk also called nonmarket or company risk
Systematic Risk
also called market risk is the risk that faced by all firms changes in economy as a whole, such as the business cycle, affect all players in the market.
why systematic risk is referred to as undiversifiable risk
since all individual securities are affected differently by economic conditions, this risk can not be offset through portfolio diversification .
Unsystematic risk
also called nonmarket or company risk , is the risk inherent in a particular investment security . this type of risk is determined by the issuer’s industry, products, customer loyalty , degree of leverage management competence, etc.
why unsystematic risk referred to as diversification risk?
since individual securities are affected differently by economic conditions , this risk can be offset by portfolio diversification.
