To evaluate the investors’ income and to make the diversification of assets in portfolio better a number of researches with the help of the concepts of Harry Markowitz developed a capital asset pricing model (CAPM), which illustrates the connection between two major economic factors – risk and expected return. One of the significant aspects of this model is a risk-free rate, which represents the profit of the investor without the risk. However, currently there is no zero-risk asset with a return, and investors need to recognize a type of security where interest rate will be minimal. Risk-free income is measured, usually at rates of government bonds, because they have little risk.
First of all, it is necessary to define the notion of risk-free rate. Damodaran (2008) states that there are two key aspects which determine this conception. On the one hand, it is absence of default risk; on the other hand, reinvestment risk should not be either. He illustrates that, for instance, government zero coupon bonds can be accepted as a risk-free, as because there are no cash flows and these securities are issued by the government, which is able to manage and restrain the printing of currency.
Weinman (2011) determines risk free rate quite similar to previous researcher, however, operates with different notions. Thus, according to Weinman, risk free rate implies the rate without the credit and market risk. While the former corresponds the absence of the default risk to investors, the latter signifies the absence of fluctuation of the securities price.
Having considered the definition of risk free rate, the work can be turned now to the question of which assets should be accepted to provide this kind of rate.
Short-term Treasury bills are t...
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..., the U.S. Treasury securities continue to be risk-free for the time being, but if the situation does not change with the sovereign debt towards the improvement, the movements of the investors and the market in general is unpredictable. Whilst many researchers generally agreed with this opinion, others already suggest new solutions on the view of a risk-free benchmark.
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Hagiu, A. (2008) ‘The Financial Instruments for Risk Management on the International Financial Markets’ Acta Universitatis anubius. Œconomica No 1, pp. 139–144
The high yield bond is a bond that features higher returns but with a lower credit rating than typical investment-grade bonds. These bonds can also be referred to as ‘junk bonds’ that are rated as below investment grade by organizations such as Moody’s and Standard and Poor’s. [Appendix #1] Generally, companies that issue high yield bonds may receive their rating due to a few characteristics, such as being less established than typical household brands, showing weak financial performance or they may have suffered a financial setback at some point in their corporate history. Although, high yield bonds may seem to have a relatively negative reputation among investors they possess many attractive advantages which include: diversifying portfolios, greater yields, lower volatility thus makings for a good long-term investment and the fact that bondholders have priority of recovering their money over equity security holders in the case of bankruptcy. These bonds are accessible to investors either as individual issues or through the means of high-yield mutual fund investments. On the other hand, there are certainly risks involved when investing in high yield bonds, such as credit risk where there is the possibility that the issuer defaults on the principal or interest payments over the course of the term and investment in these bonds ultimately depends on how informed the investor is and the amount of risk the investor is willing to tolerate. Similar to other types of securities there is always the threat of economic downturn and risks occurring when investing in international markets, such as political and exchange rate risks. In contrast, high yield bonds are able to mitigate interest rate risks better, and are less vulnerable to drast...
Mayer, M. L. (1989). 1949-1989: retail reflections. Journal of Retailing, V65 n3, p 396. JAI press, Inc.
These securities include highly liquid assets that have short-term debt such as: Commercial Paper, Certificates of Deposit, US Treasuries, and Repurchase agreements. MMMF’s hold a net asset value (NAV) of $1 per share, while the change in interest rates reflect the yield earned for investors. MMMF’s are an attractive place for investors to keep money because they can be tax-free or tax deductible, and there are usually fees to enter or withdraw from the funds.
This chapter covers the overview of the country in a short history, banking system, commercial banks and interest rate theory. The chapter provides also the theoretical review of interest rate and profitability.
Two factors contribute to the volatility of the instrument, relative interest rate risk and the FX rate associated with the note. These factors provide the financially engineered products with high potential profit but magnify the implied risk. Because Japanese rates continued to decline, the RDC’s alone no longer produced sufficient returns to investors. A leverage component was added to th...
When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a more flexible set of criteria than CAPM and takes advantage of mispriced securities
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
...n efficient set that is on a straight line connecting the risk free rate to the most northwest point that we had identified previously. Now the risk averse investor has a lower risk for the same amount of return compared to the portfolios that did not include risk free lending. The combination is better because the points on the straight line are further northwest than the portfolios from the previous paragraph. Of course the lower the level of risk aversion the further toward the tangent the investor?s optimal portfolio moves.
Capital Asset Pricing Model (CAPM) is an ex ante concept, which is built on the portfolio theory established by Markowitz (Bhatnagar and Ramlogan 2012). It enhances the understanding of elements of asset prices, specifically the linear relationship between risk and expected return (Perold 2004). The direct correlation between risk and return is well defined by the security market line (SML), where market risk of an asset is associated with the return and risk of the market along with the risk free rate to estimate expected return on an asset (Watson and Head 1998 cited in Laubscher 2002).
Furthermore, I will explain the application of theory relating to me and my purchase. I will also review the marketing activity of the organization where I purchased from. This is to explain how the two theories have been used in the marketing strategy. In addition, recommendations regarding how the marketing strategy could have been improved by applying the 2 buyer behaviour theories are given.
One might know that time is one of the most valuable assets in our lives. In the financial world the value of money is linked to time, primarily because investors expect progressive returns on their cash over periods of time, and they always compare the return from certain investments with the going or average returns in the market. Inflation on other hand erodes the purchasing power of money causing future value of one dollar to be less than the present value of a dollar. This paper will examine time value of money and the applications that determine successes or failures. An examination of the different vehicles that can be used to generate financial security for corporations and individuals will be provided. After defining the applications that generalize time value of money, an explanation will be offered regarding the components of interest rates by expanding on the concept that interest rate equates the future value of money with present value.
Rajagopal. "International Journal of Retail & Distribution Management." Emerald. Emerald Group Publishing Limited, 2011. Web. 21 Feb. 2014
The nature of the business of retailing puts retailers at a assumed risk of incurring costs because products are bought with the assumption that consumers will purchase. Additionally there are external factors that may also pose risks such as natural disasters, theft, spoilage and fire. In other circumstances retailers also extends financial credit to customers in the form of credit sales which facilitates the smooth transition from retailers to the marketplace. Retailers are in constant contact with customers which gives them the opportunity to research and study buyer’s behaviour. This involves collecting information about changes in customer preferences, perception and shifts in the demand curve. Through advertising within their stores retailers are able to exhibit and introduce existing and new products to the marketplace. Ultimately retailers are in the business of selling products to customers to achieve their goals of generating
I am currently majoring in Finance Management. Most of the time people think of finance as just managing money. However, finance is needed for so much more! The finance industry deals with starting businesses, developing new products, expanding markets, as well as everyday things like saving for retirement, purchasing a home, and even insurance. The stock market, asset allocation, portfolio analysis, and electronic commerce are all key aspects in finance. In this paper, I will explain how these features play a vital role in the industry, along with the issues that come with these factors.
The Modern portfolio theory {MPT}, "proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. The basic concepts of the theory are the efficient frontier, Capital Asset Pricing Model and beta coefficient, the Capital Market Line and the Securities Market Line. MPT models the return of an asset as a random variable and a portfolio as a weighted combination of assets; the return of a portfolio is thus also a random variable and consequently has an expected value and a variance.