Finance 100

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Identify the components of a stock’s realized return. A realized return is the amount of actual gains that is made on the value of a portfolio over a specific evaluation period. This takes into consideration any earnings generated by each of the assets contained in the portfolio, as well as any losses that were incurred as a result of a shift in the value of the individual assets. It is possible to identify the realized return associated with each asset that is held in the portfolio. Components of realized return are expected return, changes in expectations about future cash flows and changes in expectations about future discount rate. Employing the calculation of realized return helps an investor make decisions about what assets to hold for a little longer, which ones to sell immediately, and when to acquire additional shares of a given investment. Measuring the rate of return over time helps to determine if the goals set for the investment are being met. It also impacts the buying and selling of assets on reaching the goals of the firm. The realized return is used as a management tool, and knowing this return for successive periods can help an investor arrange his or her assets to best effect, and position to move onward to the next level. Contrast systematic and unsystematic return. Systematic risk is risk that influences a large number of assets called market risk. Where as unsystematic risk is a risk that influences a single company of a small group of companies, also called unique risk. Unsystematic risk is eliminated by diversification, so a portfolio with man assets has almost no unsystematic risk. Unsystematic risk is also called diversifiable risk. Systematic risk is called non diversifiable risk. Diversification eliminates unsystematic risk but does not eliminate systematic risk. No matter how much total risk an asset has, only the…...

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