FINANCE CONCEPTS

Understanding the Finance Concepts



Understanding the Finance Concepts

Answer 1) Stock's realized return

Stock realized return referred to the actual gain which earned on the portfolio value over the specific estimated, period. This amount includes any earnings that generated by the assets that held in the portfolio. However, this also includes any loses made during the shift in the value of the assets. Moreover, it is likely to recognize the realized return that is a connected with each asset.

The components of a stock realized return comprises of expected return, the return from the cash flow and return from the discount rate. Out of these components, expected return reveals the cost of equity of the firm. Expected return can be defined as the weighted average of the probability distributed of possible outcomes. Whereas, the return from cash defined as the price which set in the market on the bases of cash flow, not on the performances and earning of the corporate. Lastly, the return from discount ate stress on the rate that earned on the investment (Sharan, 2009).

Answer 2) Systematic and Unsystematic Risk

There are two types of risks, systematic risk and unsystematic risk, which faced by the organizations. Hence, the profitability of a security affected by two types of risk:

Systematic Risk

Systematic risk is that risk which cannot be diversified. This risk arises due to the risk factors that influence the whole market, for instance, change in foreign investment policy, changes in the socio economics parameters change in investment policy, international incidents, change in taxation, threats of global security, inflation, fluctuation in interest rate policy, political events etc. This risk also known as market risk and can only be mitigate by the method of hedging.

Unsystematic Risk

Unsystematic rick is that risk which can be diversified. It constitutes the component of the risk assets which connected with haphazard sources which can be, eradicated via the method of diversification. This risk arises due to the attributes of the company or industry that comprises of lawsuits, strikes, regulatory actions, loss of accounts, labor union problems, pricing, marketing strategy etc. this risk can easily be mitigated.

However, systematic risk beyond the investor control and unsystematic risk are within the control of the investor. Systematic risk cannot be mitigated. However, unsystematic Risk can be mitigated by the method of portfolio diversification. Unsystematic Risk can be neglected and have no concern in order to compensate for such risks. Whereas, systematic risks are concern they are unavoidable, and the market does compensate for such exposure (Reilly & Keith, 2008).

The above mention is the logics on which the capital asset pricing model formed. However, the higher is the systematic risk, the higher the return expected from the asset. The association between the systematic risk and the expected returns known as Capital Asset Pricing Model (CAMP).

Answer 3) Total Risk of the Portfolio

Total risk of the portfolio is largely variability of the financial asset returns. It is right that the total risk of the portfolio can never be equal to the weighted average of ...