Expected return (ER) is the return that is anticipated on an Inflation Risk Premium

investment. It represents the total amount of money you

Investors demand this premium to compensate for the risk
can expect to gain or lose with a predictable rate of return.
that inflation will erode the value of future cash flows.
Risk this refers to the uncertainty associated with the
Market Risk Premium
returns on an investment.
Used in the Capital Asset Pricing Model (CAPM), it’s the
Systematic Risk: This is the inherent risk that affects the
excess return of the overall market over the risk-free rate.
entire market, such as economic downturns or interest rate
changes. Asset allocation refers to an investment strategy in which
individuals divide their investment portfolios between
Unsystematic Risk: This is specific to individual assets or
different diverse asset classes to minimize investment risks.
companies, like management decisions or industry
performance. •Risk aversion describes how people react to conditions of
uncertainty and has implications for investment decisions.
RISK PREMIUM A risk-free investment was defined as one
for which the investor is certain of the amount and timing RISK TOLERANCE
of the expected returns. • refers to the amount of loss an investor is prepared to
Equity Risk Premium handle while making an investment decision. Several
factors determine the level of risk an investor can afford to
The additional return expected by investors for holding
take.
stocks instead of risk-free government bonds.
Holding Period - the period during which you own an
Credit Risk Premium
investment.
The extra yield demanded for investing in bonds that carry
Holding Period Return (HPR) - the return for that period .
the risk of default, such as corporate bonds.
Liquidity Risk Premium
This compensates investors for holding assets that are not
easily convertible to cash without significant loss in value.
INVESTMENT- refers to the allocation of resources, such as ENUMERATION: FINANCIAL MARKET-5
money, time, or effort, into assets, projects, or ventures with
1. Stock market- market trades shares of ownership of
the expectation of generating a future return or benefit. It
public companies. Each share comes with a price, and
involves putting resources into something that is expected to
investors make money with the stocks when they perform
grow in value or yield income over time, thereby contributing
well in the market. It is easy to buy stocks.
to wealth accumulation or achieving specific goals.
2. Bond market-It offers opportunities for companies and
Cash instruments are financial instruments with values the government to secure money to finance a project or
directly influenced by the condition of the markets. Within investment.
cash instruments, there are two types; securities and 3. Commodity market-market is where traders and investors
deposits, and loans. buy and sell natural resources or commodities such as
corn, oil, meat, and gold.
Securities: A security is a financial instrument that has
4. Derivative-involves derivatives or contracts whose value is
monetary value and is traded on the stock market. When
based on the market value of the asset being traded.
purchased or traded, a security represents ownership of a
part of a publicly-traded company on the stock exchange. FINANCIAL INTERMEDIARIES- Are various types of
institutions that connect investors with borrowers and help
derivative is a financial instrument that derives its
facilitate the flow of money within the financial system.
performance from the performance of an underlying asset.
Discount Brokerage - is an online brokerage. The online
FOREIGN EXCHANGE INSTRUMENS - These are financial tools
broker's automated network is the middleman, handling buy
used in the forex market to trade currencies, manage
and sell orders that are input directly by the investor.
currency risk, or invest in currency movements.
FINANCIAL ASSET - Things you can own that represent a
claim to money or future earnings.
REAL ASSET - Physical things that have value because they’re
useful or have intrinsic worth.
Investment Risk and Return
 An investment is an asset or item required to generate  Risk refers to the degree of uncertainty and/or
income or gain appreciation potential financial loss inherent in an investment
decision.
 An investment is the commitment of money or other
resources in the expectation of reaping future benefits. Defined in financial term as as the chance that an outcome
or investments actual gains will differ from an expected
Portfolio
outcome or return.
 A portfolio is a collection of financial investment like
stocks, bonds, commodities, cash, and cash
equivalents Return is the amount of money you earn on the assets
you've invested, or the investments overall increase in value.
 A portfolio is simply a collection is a collection of
financial investment like stocks, bonds, commodities, 3 Things That Investors Always Consider
cash, and cash equivalents of investment assets
1. FLEXIBILITY/LIQUIDITY -How readily investors can get
Investment and Portfolio Management their money.
 Investment & Portfolio Management refers to the 2. TIME/DURATION -How fast their money will grow.
handling of an investment portfolio or a grouping of
3. SECURITY & SAFETY -How safe their money will be.
assets.
 It is also the art of selecting and overseeing a group of
investments that meet the long term financial
objectives and risk tolerance of a client, a company, or
an institution