FIN 301 Chapter Notes - Chapter 2: Capital Asset Pricing Model, Corporate Finance, Random Walk Hypothesis

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13 Jan 2017
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Chapter 2 ten basic principles of finance. 2. 1 return versus risk: higher returns require taking more risk. Finance theory assumes that a rational investor prefers to receive a higher rate of return on an investment to a lower return, and would rather accept less risk than more risk in earning that return. A trade-off occurs between a higher expected return on and the greater risk of an investment: safe investments have low returns, high returns require investors to take big risks. The results of the i&s study are important and show the direct relationship between the expected return of an asset class and the risk associated with receiving that return. The average percentage return is calculated on a compound average and simple average basis: compound annual return is our preferred measure of return. When investing in common stocks and accepting greater risk, investors have increased potential returns significantly.

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