InvestmentsMBA536.pptVIP

InvestmentsMBA 536 Dr. David P Echevarria Cameron School of Business University of North Carolina Wilmington Unit 2: Risk and Return Unit 2 begins our journey into the fundamental analysis of risk and return. As we delve into the statistical nature of risk measurement, we must remind ourselves that the market is always and everywhere an expectations phenomenon. We don’t really know a lot about the future. We know quite a bit about the past and attempt to use it as a guide to discerning the future. A caution is warranted as we observe the elaborate mathematical and statistical models that purport to explain the market’s behavior. We note with interest the disclaimer in every prospectus; “…past performance is no guarantee of future performance, investigate before you invest…” Chapter 5: Introduction to Risk and Return I. STUDENT LEARNING OBJECTIVES The role of supply and demand for funds The concept of market equilibrium How does the government affect supply and demand? Can we predict future interest rates? The risk premium concept Chapter 5: Introduction to Risk and Return II. DEMAND FOR [LOANABLE] FUNDS Households Consumption and saving a function of income Consumption above current income levels financed with borrowing. Business Finance asset expansion (20% using external capital) Government Demand for funds Inelastic with respect to rates. Foreign Additional sources of risk – exchange rate volatility Chapter 5: Introduction to Risk and Return III. SUPPLY OF LOANABLE FUNDS Households are net suppliers of funds. The supply of funds is a function of risk and return. The supply of funds is also subject to investor preferences. Governments may also supply funds (credit or specie). Chapter 5: Introduction to Risk and Return IV. EQUILIBRIUM INTEREST RATE Equilibrium ≡ point at which markets clear (no excess supply or demand). Question: Is an equilibrium point observable? Question: Is equilibrium an important concept? Changes in the Equilibrium Interest Rate Change in r