投资学全英文ppt-4.ppt

Chapter 4Return and RiskCopyright 2014 Pearson Education,Inc.All rights reserved.4-2 Return and RisksLearning Goals1.Review the concept of return,its components,the forces that affect the investors level of return,and historical returns.2.Discuss the role of time value of money in measuring return and defining a satisfactory investment.3.Describe real,risk-free,and required returns and the calculation and application of holding period return.Copyright 2014 Pearson Education,Inc.All rights reserved.4-3 Return and RisksLearning Goals(contd)4.Explain the concept and calculation of yield and how to find growth rates.5.Discuss the key sources of risk that might affect potential investments.6.Understand the risk of a single asset,risk assessment,and the steps that combine return and risk.Copyright 2014 Pearson Education,Inc.All rights reserved.4-4 The Concept of ReturnReturnThe level of profit from an investment,orThe reward for investingComponents of ReturnIncome:cash or near-cash that is received as a result of owning an investmentCapital gains(or losses):the difference between the proceeds from the sale of an investment and its original purchase priceTotal Return:the sum of the income and the capital gain(or loss)earned on an investment over a specified period of timeCopyright 2014 Pearson Education,Inc.All rights reserved.4-5 Why Return is ImportantThe rate of return indicates how rapidly an investor can build wealth.Allows us to“keep score”on how our investments are doing compared to our expectationsHistorical PerformanceProvides a basis for future expectationsDoes not guarantee future performanceExpected ReturnReturn an investor thinks an investment will earn in the futureDetermines what an investor is willing to pay for an investment or if they are willing to make an investmentCopyright 2014 Pearson Education,Inc.All rights reserved.4-6 Key Factors in ReturnInternal Characteristics Type or risk of investment Issuers management Issuers financingExternal Forces Political environment Business environment Economic environment Inflation DeflationCopyright 2014 Pearson Education,Inc.All rights reserved.4-7 Table 4.4 Historical Returns for Select Asset Classes(1900-2011)Copyright 2014 Pearson Education,Inc.All rights reserved.4-8 The Time Value of Money and ReturnsThe sooner you receive a return on a given investment,the betterA dollar received today is worth more than a dollar received in the futureThe sooner your money can begin earning interest,the faster it will growCopyright 2014 Pearson Education,Inc.All rights reserved.4-9 Determining a Satisfactory InvestmentSatisfactory Investment:one for which the present value of benefits equals or exceeds the present value of its costsCopyright 2014 Pearson Education,Inc.All rights reserved.4-10 Measuring ReturnRequired ReturnThe rate of return an investor must earn on an investment to be fully compensated for its riskCopyright 2014 Pearson Education,Inc.All rights reserved.4-11 Measuring Return(contd)Real Rate of ReturnEquals the nominal rate of return minus the inflation rateMeasures the change in purchasing power provided by an investmentExpected Inflation PremiumThe average rate of inflation expected in the futureCopyright 2014 Pearson Education,Inc.All rights reserved.4-12 Measuring Return(contd)Risk-free RateThe rate of return that can be earned on a risk-free investmentThe most common“risk-free”investment is considered to be the 3-month U.S.Treasury BillCopyright 2014 Pearson Education,Inc.All rights reserved.4-13 Measuring Return(contd)Risk PremiumAdditional return an investor requires on a risky investment to compensate for risks based upon issue and issuer characteristicsIssue characteristics are the type,maturity and featuresIssuer characteristics are industry and company factorsCopyright 2014 Pearson Education,Inc.All rights reserved.4-14 Holding Period Return(HPR)Holding Period:the period of time over which an investor wishes to measure the return on an investment vehicleRealized Return:current return actually received by an investor during the given return periodPaper Return:return that has been achieved but not yet realized(no sale has taken place)Copyright 2014 Pearson Education,Inc.All rights reserved.4-15 Holding Period Return(HPR)Holding Period ReturnThe total return earned from holding an investment for a specified holding period(usually 1 year or less)Copyright 2014 Pearson Education,Inc.All rights reserved.4-16 Table 4.6 Key Financial Variables for Four InvestmentsCopyright 2014 Pearson Education,Inc.All rights reserved.4-17 Using HPR in Investment DecisionsAdvantages of Holding Period ReturnEasy to calculateEasy to understandConsiders income and growthDisadvantages of Holding Period ReturnDoes not consider time value of moneyRate may be inaccurate if time period is longer than one yearCopyright 2014 Pearson Education,Inc.All rights reserved.4-18 Yield:Internal Rate of Return(IRR)Internal Rate of Return:determines the compound annual rate of return earned on an investment held for longer than one yearYield(IRR)Example:What is the yield(IRR)on an investment costing$1,000 today that you expect will be worth$1,400 at the end of a 5-year holding period?Copyright 2014 Pearson Education,Inc.All rights reserved.4-19 Calculating an Investments Yield Using an Excel Spreadsheet Copyright 2014 Pearson Education,Inc.All rights reserved.4-20 Using IRR in Investment Decisions(contd)Advantages of Internal Rate of ReturnUses the time value of moneyAllows investments of different investment periods to be compared with each otherIf the yield is equal to or greater than the required return,the investment is acceptableDisadvantages of Internal Rate of ReturnCalculation is complexCopyright 2014 Pearson Education,Inc.All rights reserved.4-21 Yield(IRR)for a Stream of IncomeSome investments,such as bonds,provide uneven streams of income over the investment periodCalculate yield(IRR)by finding the discount rate that equates the PV of the investments income stream to its market priceTable 4.7 Present Value Applied to an InvestmentCopyright 2014 Pearson Education,Inc.All rights reserved.4-22 Internal Rate of Return(IRR):Using an Excel Spreadsheet Copyright 2014 Pearson Education,Inc.All rights reserved.4-23 Interest on Interest:The Critical AssumptionUsing yield(IRR)to measure return assumes that all income earned over the investment horizon is reinvested at the same rate as the original investment.Reinvestment Rate is the rate of return earned on interest or other income received from an investment over its investment horizon.Fully compounded rate of return is the rate of return that includes interest earned on interest.Copyright 2014 Pearson Education,Inc.All rights reserved.4-24 Figure 4.1 Earning Interest on InterestCopyright 2014 Pearson Education,Inc.All rights reserved.4-25 Finding Growth RatesRate of GrowthThe compound annual rate of change in the value of a stream of incomeUsed to see how quickly a stream of income,such as dividends,is growingCopyright 2014 Pearson Education,Inc.All rights reserved.4-26 Finding Growth RatesGrowth Rate Example:Stock paid$0.92 dividend in 2002 and$1.85 in 2011.Whats the average annual growth rate over this period?Copyright 2014 Pearson Education,Inc.All rights reserved.4-27 Finding Growth Rates:Using an Excel Spreadsheet Copyright 2014 Pearson Education,Inc.All rights reserved.4-28 Sources of RiskRisk-Return Tradeoff is the relationship between risk and return,in which investments with more risk should provide higher returns,and vice versaRisk is the chance that the actual return from an investment may differ from what is expectedCopyright 2014 Pearson Education,Inc.All rights reserved.4-29 Sources of Risk(contd)Business Risk is the degree of uncertainty associated with an investments earnings and the investments ability to pay the returns owed to investors.Types of Investments AffectedCommon stocks Preferred stocksExamples of Business RiskDecline in company profits or market shareBad management decisionsCopyright 2014 Pearson Education,Inc.All rights reserved.4-30 Sources of Risk(contd)Financial Risk is the degree of uncertainty of payment resulting from a firms mix of debt and equity;the larger the proportion of debt financing,the greater this risk.Types of Investments AffectedCommon stocksCorporate bondsExamples of Financial RiskCompany cant get additional loans for growth or to fund operationsCompany defaults on bondsCopyright 2014 Pearson Education,Inc.All rights reserved.4-31 Sources of Risk(contd)Purchasing Power Risk is the chance that changing price levels(inflation or deflation)will adversely affect investment returns.Types of Investments AffectedBonds(fixed income)Certificates of depositExamples of Purchasing Power RiskMovie that was$8.00 last year is$9.00 this yearCopyright 2014 Pearson Education,Inc.All rights reserved.4-32 Sources of Risk(contd)Interest Rate Risk is the chance that changes in interest rates will adversely affect a securitys value.Types of Investments AffectedBonds(fixed income)Preferred stocksExamples of Interest Rate RiskMarket values of existing bonds decrease as market interest rates increaseIncome from an investment is reinvested at a lower interest rate than the original rateCopyright 2014 Pearson Education,Inc.All rights reserved.4-33 Sources of Risk(contd)Liquidity Risk is the risk of not being able to liquidate an investment conveniently and at a reasonable price.Types of Investments AffectedSome small company stocksReal estateExamples of Liquidity RiskThe price of a house has to be lowered for a quick saleCopyright 2014 Pearson Education,Inc.All rights reserved.4-34 Sources of Risk(contd)Tax Risk is the chance that Congress will make unfavorable changes in tax laws,driving down the after-tax returns and market values of certain investments.Types of Investments AffectedMunicipal bondsReal estateExamples of Tax RiskLower tax rates reduce the tax benefit of municipal bond interestLimits on deductions from real estate lossesCopyright 2014 Pearson Education,Inc.All rights reserved.4-35 Sources of Risk(contd)Event Risk comes from an unexpected event that has a significant and unusually immediate effect on the underlying value of an investment.Types of Investments AffectedAll types of investmentsExamples of Event RiskDecrease in value of insurance company stock after a major hurricaneDecrease in value of real estate after a major earthquakeCopyright 2014 Pearson Education,Inc.All rights reserved.4-36 Sources of Risk(contd)Market Risk is the risk of decline in investment returns because of market factors independent of the given investment.Types of Investments AffectedAll types of investmentsExamples of Market RiskStock market decline on bad newsPolitical upheavalChanges in economic conditionsCopyright 2014 Pearson Education,Inc.All rights reserved.4-37 Sources of Risk(contd)Currency Exchange Risk is the risk caused by the varying exchange rates between the currencies of two countries.(Discussed in Chapter 2)Types of Investments AffectedInternational stocks or ADRsInternational bondsExamples of Currency Exchange RiskU.S.dollar gets“stronger”against foreign currency,reducing value of foreign investmentCopyright 2014 Pearson Education,Inc.All rights reserved.4-38 Measures of Risk:Single AssetStandard deviation is a statistic used to measure the dispersion(variation)of returns around an assets average or expected returnCoefficient of variation is a statistic used to measure the relative dispersion of an assets returns;it is useful in comparing the risk of assets with differing average or expected returnsHigher values for both indicate higher riskCopyright 2014 Pearson Education,Inc.All rights reserved.4-39 Table 4.10 Historical Returns and Standard Deviations for Select Asset Classes(19002011)Copyright 2014 Pearson Education,Inc.All rights reserved.4-40 Figure 4.2 Risk-Return Tradeoffs for Various InvestmentsCopyright 2014 Pearson Education,Inc.All rights reserved.4-41 Acceptable Levels of Risk Depend Upon the Individual InvestorRisk-indifferent describes an investor who does not require a change in return as compensation for greater riskRisk-averse describes an investor who requires greater return in exchange for greater riskRisk-seeking describes an investor who will accept a lower return in exchange for greater riskCopyright 2014 Pearson Education,Inc.All rights reserved.4-42 Figure 4.3 Risk PreferencesCopyright 2014 Pearson Education,Inc.All rights reserved.4-43 Steps in the Decision Process:Combining Return and RiskEstimate the expected return using present value methods and historical/projected return ratesAssess the risk of the investment by looking at historical/projected returns using standard deviation or coefficient of variation of returnsEvaluate the risk-return of each investment alternative to make sure the return is reasonable given the level of riskSelect the investments that offer the highest expected returns associated with the level of risk you are willing to acceptCopyright 2014 Pearson Education,Inc.All rights reserved.4-44 Chapter 4 ReviewLearning Goals1.Review the concept of return,its components,the forces that affect the investors level of return,and historical returns.2.Discuss the role of time value of money in measuring return and defining a satisfactory investment.3.Describe real,risk-free,and required returns and the calculation and application of holding period return.Copyright 2014 Pearson Education,Inc.All rights reserved.4-45 Chapter 4 Review(contd)Learning Goals(contd)4.Explain the concept and calculation of yield and how to find growth rates.5.Discuss the key sources of risk that might affect potential investment vehicles.6.Understand the risk of a single asset,risk assessment,and the steps that combine return and risk.Copyright 2014 Pearson Education,Inc.All rights reserved.4-46 Chapter 4Additional Chapter ArtCopyright 2014 Pearson Education,Inc.All rights reserved.4-47 Table 4.1 Profiles of Two InvestmentsCopyright 2014 Pearson Education,Inc.All rights reserved.4-48 Table 4.2 Total Returns of Two InvestmentsCopyright 2014 Pearson Education,Inc.All rights reserved.4-49 Table 4.3 Historical Investment Data for ExxonMobil Corp.(XOM)Copyright 2014 Pearson Education,Inc.All rights reserved.4-50 Table 4.5 Present Value Applied to an InvestmentCopyright 2014 Pearson Education,Inc.All rights reserved.4-51 Table 4.8 Historical Returns for Target and American Eagle OutfittersCopyright 2014 Pearson Education,Inc.All rights reserved.4-52 Table 4.9 Calculation of Standard Deviations of Returns for Target and American Eagle Outfitters