ACCTG 241 Lecture Notes - Lecture 1: Liquidity Risk, Risk Premium, Interest
20 Jan 2017
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Document Summary
Return of investment return of the original amount invested. Return on investment additional amount returned in excess or less than the original amount invested. Rate of return: performance measured on a common size basis, eliminates distortion when comparing investments with varying amounts of initial investment, negative rate of return is possible. Risk: the chance of an unfavorable outcome, risk adverse avoid risk, risk seekers enjoy risk. Inflation risk risk of changing price levels: business risk risk of a particular company going out of business, liquidity risk risk that an investment cannot be converted into cash when needed. How are risk and return related: expected rate of return estimated rate of return on an investment, risk premium expected rate of return adjusted for inflation, business, and liquidity risk. The greater the risk, the higher the expected rate of return. Interest rate is used to determine equivalence given a particular period of time. Principal * rate * time: compounded.
