What is the relationship between real assets and financial assets?

Real assets are the assets that a business or investor owns, such as land, building, and more. A financial asset, on the other hand, are liquid assets that one can easily or quickly convert into cash, such as stock, bonds, and securities, etc.

What is the difference between a required rate of return and an expected rate of return?

The required rate of return is the return that an investor requires to make an investment in an asset, an investment, or a project. The expected rate of return is the return that the investor expects to receive once the investment is made.

What is the difference between real and financial investments?

Financial Investment: it involves investment in shares, debentures bonds and other securities. Real Investment: It involves investment in land, building, gold and silver. As real investment involves exchange of real property, once the transfer of property takes place the risk of uncertainty is minimum.

What are real assets and what are financial assets What are the main differences between them use some examples to illustrate your answers?

Financial assets include things like stocks, bonds and cash. Real assets include things like real estate, infrastructure and commodities.

Is the relationship between risk and return linear?

The relationship between risk and return is a key facet of portfolio management and often misunderstood, with many under the assumption that this relationship is linear. The strategy works because both low-risk and high-risk investors help each other to achieve the enhanced return.

How are asset prices determined?

Under General equilibrium theory prices are determined through market pricing by supply and demand. Here asset prices jointly satisfy the requirement that the quantities of each asset supplied and the quantities demanded must be equal at that price – so called market clearing.

What relationship does risk have to return economics quizlet?

The relationship between risk and required rate of return is known as the risk-return relationship. It is a positive relationship because the more risk assumed, the higher the required rate of return most people will demand.

What is return in finance?

A return, also known as a financial return, in its simplest terms, is the money made or lost on an investment over some period of time. A return can also be expressed as a percentage derived from the ratio of profit to investment.

What is the relationship between required return and stock price?

If the required return rises, the stock price will fall, and vice versa. This makes sense: if nothing else changes, the price needs to be lower for the investor to have the required return. There is an inverse relationship between the required return and the stock price investors assign to a stock.

What is the relationship between cost of capital and IRR?

So long as the IRR exceeds the cost of capital, the higher the projected IRR on a project, the higher the net cash flows to the company. On the other hand, if the IRR is lower than the cost of capital, the rule declares that the best course of action is to forego the project or investment.

How to calculate the expected return of an asset given risk?

The formula for calculating the expected return of an asset given its risk is as follows: The general idea behind CAPM is that investors need two forms of compensation: time value of money and risk. The risk-free rate in the formula represents the time value of money and compensates the investors for placing money in any investment over time.

What is an example of capital asset pricing model?

Example of Capital Asset Pricing Model. The risk-free rate is 2 percent, and the beta (risk measure) of a stock is 2. The expected market return over the period is 10 percent, so that means that the market risk premium is 8\% (10\% – 2\%) after subtracting the risk-free rate from the expected market return.

Why do asset prices fall when interest rates increase?

A second reason asset prices fall when interest rates increase is it can profoundly influence the level of net income reported on the income statement. When a business borrows money, it does through either bank loans or by issuing corporate bonds.

Why do we analyze return data rather than price series?

It turns out that asset returns exhibit more attractive statistical properties than asset prices themselves. Therefore it also makes more statistical sense to analyze return data rather than price series. 1.1 Returns LetPtdenotethepriceofanassetattimet.