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Concept
Objective of investment: to maximize returns subject to constraint
of risk
Realised return: historical, was actually earned on an investment
Expected return: future; anticipated based on past historical data
and future growth estimation
Required return: minimum expected rate of return required to
induce investment in that particular security, based on its risk
component
Components: yield (current, periodic cash receipts like dividends,
interest); capital gain/loss (sale price less purchase price)
Measuring Rate of Return
Generally speaking,
Return= addition of income/cash flows and
capital gain (loss) divided by purchase price
Stock’s rate of return and Bond’s rate of
return: concept of face value in a bond and
periodicity of payment of interest
Probabilities and rate of return