Investors receive their returns from shares in the form of dividends and capital gains/ losses. First we turn our attention to the concept of expected return. He asks the following questions: ‘What is the future expected return from the shares? What extra return would I require to compensate for undertaking a risky investment?’ Let us try and find the answers to Joe’s questions. He is trying to determine if the shares are going to be a viable investment. He is considering buying some shares in A plc. Joe currently has his savings safely deposited in his local bank. UNDERSTANDING AN NPV CALCULATION FROM AN INVESTOR’S PERSPECTIVE
understand and be able to explain why the market only gives a return for systematic risk. understand and explain the nature of risk as portfolios become larger. understand the significance of correlation in risk reduction. calculate the expected return and standard deviation of an individual investment and for two asset portfolios. understand an NPV calculation from an investor’s perspective. We shall see that it is possible to maintain returns (the good) while reducing risk (the bad).īy the end of this article you should be able to: Thus the key motivation in establishing a portfolio is the reduction of risk. A wiser policy would be to spread the funds over several investments (establish a portfolio) so that the unexpected losses from one investment may be offset to some extent by the unexpected gains from another. The logic is that an investor who puts all of their funds into one investment risks everything on the performance of that individual investment. This is neatly captured in the old saying ‘don’t put all your eggs in one basket’. In this article on portfolio theory we will review the reason why investors should establish portfolios. We need to understand the principles that underpin portfolio theory, before we can appreciate the creation of the Capital Asset Pricing Model (CAPM). This approach has been taken as the risk-return story is included in two separate but interconnected parts of the syllabus. The risk-return relationship is explained in two separate back-to-back articles in this month’s issue. Relevant to ACCA Qualification Papers F9 and P4 #Dimensionless weighted standard deviation good professional#
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