ECONOMICS FINANCE

Economics Finance



Economics Finance

Identify the components of a stock's realized return.

A realized return can be defined as the amount of actual gains that makes on the value of a portfolio over a specific evaluation period. Stock realized return's calculation takes into consideration any earnings yielded by each of the assets comprised in the portfolio, as well as any loss which incurred as a product of a change in the values of the investors' assets. It is also likely to identify the realized return associated with each asset that is held in the portfolio.

I believe that stock's realized return also has to deal with dividends, distributions, and share price appreciation. All dividends are immediately reinvested and used to purchase additional shares of the same stock or security. The distribution of realized returns is standard deviation is the square root of the variance of the distribution variance measures the variability in return by taking the differences of the returns from the average return and squaring those differences. Realized returns are the total return that occurs a particular time period. The components of realized returns are Individual investment realized return and portfolio. 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. When calculating the realized return on a portfolio that includes bond issues, it is important to focus on the actual interest payments that are received on bond coupon for the period cited (Shafran, 2007).

Contrast systematic and unsystematic risk.

Systematic risk is also known as with the name of market or aggregate risk. It is associated with the overall market and correlated with the overall return of market, where as the unsystematic risk is referred as idiosyncratic risk or specific risk. It is associated with a specific corporation or industry, and the return is correlated with the specific company in the portfolio. Systematic risks are fluctuations of a stock's return that are due to market-wide news representing common risk. Unsystematic risk are fluctuations of a stock's return that are due to firm or industry-specific news and are independent risks unrelated across stocks. The unsystematic risk for each stock will average out and be eliminated by diversification. Good news will affect some stocks and bad news will affect others. Diversification does not reduce systematic risk. Even when holding a large portfolio an investor will be exposed to risks that affect the entire economy and therefore affect all securities. You can reduce the systematic risk of a portfolio by selling stocks and investing in risk-free bonds, but at the cost of giving up the higher expected return of stocks (Odean, 1999).

Explain why the total risk of a portfolio is not simply equal to the weighted average of the risks of the securities in the portfolio.

A portfolio return is the weighted average of the returns of the securities in the ...