Principles of Finance Assignment 2

Assignment 2

Principles of Finance – FIN 100

Ginger Tyner

Strayer University

Professor Kalonji Ntambwe

November 28, 2010

Abstract

This Report will contain answers to five (5) questions asked concerning:

• Identify the components of a stock’s realized return.

• Knowing the contrast of systematic and unsystematic risk

• Explaining why Total Risk of a Portfolio is not equal to Weighted Average Risk of securities in a portfolio.

• Understanding what Beta measures

• Understanding what WACC measures and understand WACC assumptions used to value a project.

Assignment 2

1. Identify the components of a stock’s realized return.

The component of a stock’s realized return is the total return that occurs over a time period. There are several reasons why an investor would want to confirm periodically, the actual return generated on his or her investments. The first has to do with the stability of the portfolio itself. If the rate of return for the portfolio overall is low or should decrease, this is a sign that some diversification in the types of investments would be a good idea. In the event that the portfolio is already diverse, a loss in return could indicate that one or more of the investment types compose a higher percentage of the overall worth of the collected assets than they should. With both scenarios, noting that the realized return is not what it should be can prompt the investor to make changes before further losses are incurred. (Berk, DeMarzo, and Harford, 2010)

2. Contrast systematic and unsystematic risk.

A systematic risk is one that influences a large number of assets, each to a greater or lesser extent. Since systematic risks have market wide effects, they are sometimes called market risks. Systematic risk is due to risk factors that affect the entire market such as investment policy changes, foreign investment policy, change in taxation clauses, shift in socio-economic parameters, and global security threats....