finance

Running Head : FINANCE

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Date : Finance

Part 1

Definitions

1 . Investment

It is a process that refers to laying aside of some amount of money for the purposes of deriving profit in the future . It mostly applied by the firms and government when they want to acquire capital goods that allow the increased production of the consumer goods and services in the future time periods

2 . Required Rate of Return

It is the rate of return that is needed to induce the

investors or companies to invest in something in an organization . It is the discounted cash flow analysis that is above an investment that is to be carried out and that which is below that it does not and is based on the firms cost of capital or the weighted average cost of capital plus or minus a risk premium that reflects the project risk characteristics

3 . Risk-free rate of return

It refers to the minimum return as investor expects from any investment since he or she will not accept additional risk that is related to an investment unless the potential rate of return is greater than the risk-free rates . It usually represents the interest an investor would expect from an absolutely risk-free investment that takes place over a specified period of time

4 . Fundamental risk

It refers to the exposure that an investor is exposed to mostly as a loss from a situation that affects a large group of people or firms that are caused by natural phenomenon such as earthquake , flood , hurricane or the social phenomenon such as inflation , unemployment and ware . They may be insurable or not insurable

5 . Systematic Risk

It is also referred to as the un-diversifiable or the market risk . It is the risks can affect the entire market and it cannot be avoided through diversification , but can be mitigated through hedging . The different sources of systematic risks are interest rates , recession and hours . The value of investments may decline over a given period simply because of the economic changes or the other events that impact on the large portion of the markets

6 . Equity investment

It refers to the buying and selling of shares of stock in the stock market by the individuals and the funds in the anticipation of the income in form off the dividends and capital gain as the value of stock increases

7 . Fixed income investments

It is a type of security that pays a fixed rate of return and it offers protection against market risk , but it does not protect the holders of the securities against the risk such as inflation . It involves securities such as bond or stock

8 . Option investment

The option is a derivative security whose value is determined by the underlying issues which may be either common stock or index and it 's widely followed by the baskets of stocks . The choice of the best investment option depends on the personal circumstances such as the general market conditions . For...