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CHAPTER 14 principles of investment.docx

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Ryerson University
FIN 502
Steve Joyce

CHAPTER 14 principles of investmentINVESTING AND SAVINGSaving money that you did not spend money left over after your consumptionInvesting using the savings that you have and putting it in investments to earn a rate of returnBASIC CHARACTERISTICS OF AN INVESTMENTImportant characteristicsreturn risk liquidity marketability term short term long term management tax considerations divisibilityIncome return periodic cash flow that the investor receivesCapital gain return generated when you sell it for a price higher than what you paid for itTotal return income return plus the capital gain return Rate of return holding period return R or HPRPPDP 100 Pprice at the beginning of the holding period 0 Pprice at the end of the holding period 1 Dincome return interest or dividend during the holding periodRealized rate of return rate of return that actual occurred in a past periodExpected rate of return return that is expected to happen in the future ErEPPEDP 100 Pprice today or at the beginning of the period 0 EDexpected income during the periodINVESTMENT RISKSRisk is the uncertainty about the rate of return that you will earn from an investmentVariability one way of measuring risk in an investments rate of return o Investments with more variability in their rate of return are riskier than investments with less variability because the larger of
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