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Financial Manager

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Identify the components of a stock's realized return.

There are several reasons why an investor would want to periodically confirm the actual return generated on his or her investments. 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. In the event that the portfolio is already diverse, a loss in return could indicate that one or more of the investment types compose a higher percentage of the overall worth of the collected assets than they should. With both scenarios, noting that the realized return is not what it should be can prompt the investor to make changes before further losses are incurred. 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. For example, if a bond issue with a ten-year duration offers a 5% annual interest payment, the investor will only include that amount in the return if the payment has already been received. By contrast, the investor will note any increases in the unit price of each share of stock in the portfolio, since that figure reflects the change in the market value of those shares as of the end of the period under consideration.

Contrast systematic and unsystematic risk.

Unsystematic risk represents the portion of an asset's risk that is associated with random causes that can be eliminated through diversification. It's attributable to firm-specific events, such as strikes, lawsuit, regulatory actions, and loss of a key account. Unsystematic risk is due to factors specific to an industry or a company like labor unions, product category, research and development, pricing, marketing strategy etc. While systematic risk is the relevant portion of an asset's risk attributable to market factors that affect all firms such as war, inflation, international incidents, and political events. It cannot be eliminated through diversification and the combination of a security's non-diversifiable risk and diversifiable risk is called total risk. In the other word Systematic risk is due to risk factors that affect the entire market such as investment policy changes, foreign investment policy, change in taxation clauses, shift in socio-economic parameters, global security threats and measures etc. Systematic risk is beyond the control of investors and cannot be mitigated to a large extent. In contrast to this, the unsystematic risk can be mitigated through portfolio diversification. It is a risk that can be avoided and the market does not compensate for taking such risks.



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