ALL ONE QUESTION FOR DISCUSSION POST

Part 1

• How would you measure the return of an investment? What information do you need to know?

  Suppose you buy an asset and you sell it one year later. The cash outflow is your initial purchase price and you have two cash inflows. One associated with the sale of the asset and the other with the operation of the asset. Make up an example with numbers and share what your return is from that investment. Can you compute the percentage rate of return? Can you rate the term Capital gain/loss to this example?

Part 2

• How would you measure the risk of an investment? What information would you need to know? What does a portfolio of assets refer to? Why might a portfolio of assets have less risk than holding only one asset?

Part 3

• What return would you demand for taking on an investment? How might you compute that return? Have you ever considered an investment in an asset? How do you know if the return that you expect is enough?

  Suppose there is an investment with two times as much risk as the average investment. Suppose further that you can invest in an asset with no risk and you will earn a return of 1%. You could also invest in the average investment that is expected to return 6%. What is a fair return for the investment that has two times as much risk? Explain your answer.

Part 4

• A familiar risky asset that people purchase is car insurance. Suppose 10 people all pay $2000 per year for car insurance If you expect that of the people will experience a $10,000 loss in the next five years, will this insurance be a good deal? Why might you choose to buy the insurance anyway? What is the probability of getting in an accident in any given year? What is the probability of not getting in an accident?