4.1 Return on investment is the amount of profit expected from an investment. For example, I invested $194 on a pair of limited edition sneakers knowing that there would be a demand for them in the aftermarket. I listed them for $350 and sold them for $300. The return on my investment was $106. This is what is meant by a return on investment.
Income comes in forms of dividends from stocks, mutual funds, or interest received on bonds. Income for an investment is the money that investor receive periodically from investments they own. Capital gains/losses focus on the change in an investment’s market value. If the investment sells for more than the price it was purchased for, it is considered a capital gain. If the investments sell for under the original price it was purchased for than it is considered a capital loss.
4.2 Historical performance data provides an idea, or a basis, on what to expect in the future. Although they give a start of what to expect, this doesn’t mean that the data will guarantee future performances. Historical data must be studied carefully in order to make a solid estimate on future expectations.
External forces are factors that cannot be controlled by any one investor or person. These forces include Federal Reserve actions, wars, and price controls. Investments could react differently depending on these factors. This means that while one investment’s worth goes up, a different investment’s value can drop, simultaneously.
Internal characteristics are forces that include types of investments, quality of management in firms, and the way the investment is financed. Investors expect a certain return by big time companies that are being run efficiently compared to a small based company that isn’t doing as wel...
... middle of paper ...
...ment’s expected return takes time value of money into consideration.
Use historical data or projected return data to evaluate the risk involved with the investment you’re making. A couple of ways to evaluate an investment’s risk are by making sound judgements, calculating the standard deviation of its returns, or by using a different method mentioned within the chapter.
Look up the risk-return characteristics of every investment option to be sure that the return you’re expecting is worth the risk you take. If you can take less risk and make the same return or same risk with a higher return, you investment is not worth it.
Always be sure to make investments that offer the best returns that correlate with the kind of risk you’re comfortable taking. If you manage to get a high return for the risk you’re willing to take, than that would be considered a “good” investment.
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