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Financial Markets Assignment - Essay Example

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A large number of different assets exist into which a saver can invest cash not currently needed, and investors must choose what combination best suits their needs. Because more money is considered to bring more happiness or utility, investors generally seek to maximize the return on their investments.
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Download file to see previous pages sk and return of different types of investments, it should be noted that past returns are no guarantee of future performance, especially with respect to expected returns, even over time intervals as long as several decades. However, past returns over very long time horizons can be informative.
For instance, a 1987 study by Jones and Wilson indicated that $1 invested in 1870 Would have grown over the next century (by 1985) to $13,264 if invested in U.S. stocks, $340 if invested in U.S. long-term bonds, and $260 if invested in U.S. short-term money market debt (in the meantime, consumer prices had risen so that it took $8.40 to buy what $1.00 bought in 1870). Although equity returns have greatly exceeded debt returns over the entire time interval, bond returns matched those of stocks over time intervals as long as 60 years (e.g., 1872 to 1932).
In another study (by Siegel in 1992), it was found that bond returns exceeded those of stock returns over another 50+ year period, from 1802 to 1861, although a dollar invested into stocks in 1802 would have grown in value to $955,000 by 1990 compared to only $5770 for long-term bonds, $2680 for short-term bonds, and $15.80 for gold (it should be mentioned that it took $11.10 in 1990 to buy what $1.00 bought in 1802). Thus, although stocks tend to average higher returns than bonds over the very long term, there is substantial risk of stocks underperforming bonds even over fairly long time horizons. On the other hand, commodity investments like gold tend to be very poor investments over long time horizons (even though they do tend to keep up with inflation)
Although the return to real estate was not measured in these studies, most believe that average real estate returns have been close to that for stocks. However, many analysts...
The value of any asset is a function of the cash flows expected from the asset. These cash flows can be valued by discounting them at an appropriate interest rate. The appropriate discount rate is the minimum expected return that is required on assets with similar risk (and with other relevant characteristics). Discounting the expected cash flows by the required returns yields a value, which if paid as the price for the asset, would result in an internal rate of return (IRR) equal to the minimum required return.
Victor A. Canto and Arthur B. Laffer Theory and common experience postulate that general economic factors impact stock prices in the aggregate. These same factors can have substantially different effects, depending on the size, location, and the industry groups being considered.Over the past decade, research at A. B. Laffer, V. A. Canto & Associates has focused on developing a portfolio strategy that would identify differential performance based on overall economic environment, location, and size. ...Download file to see next pagesRead More
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