Financial Concepts Essay Example | Topics and Well Written Essays - 750 words

Financial Concepts - Essay Examplen to compensate for the underlying venture involved .This stride of comeback (Ke) is defined as the sum of risk free rate of return (Rf) and risk premium (Rm- Rf) multiplied by beta (KPMG, 2005).Thus beta is effective in calculating the rate of return of a risky asset and thus very applicable in investing decisions.2.2. Variance- It is a standard statistical measure of the dispersion of a set of data points around their mean value. In finance, the variance of the market return is the expected squared deviation from the expected return (Myers, 2000). Variance is useful in measuring portfolio risk in the sense that it measures the volatility from average value. This helps the investors in risk estimate while purchasing stocks or bonds (Investopedia, 2010).2.3. Duration It is defined as the average number of years to an assets discounted cash flows (Myers,2000).It denotes how much sensitive is the price of a fixed income investment to a transmut e in interest rates. The bigger the duration, the greater the reward for bond prices. Thus this is applicable in investment decisions.2.4. Return on Assets (ROA) It is defined as the ratio of net income to total assets (Myers, 2000). It indicates how efficiently a keep corporation is using its total assets to generate its earnings. It is an indicator of a companys efficiency and profitability.2.5 Return on Equity (ROE) It is defined as the ratio of net income to shareholders equity(Myers,2000). It an indicator of the profitability of a company. It shows how profitable a company is making use of the money invested by the shareholders2.6. Cost of Capital- Each star sign expects a minimum rate of return on its investments as earnings for attracting new capital and to take its current value. This rate of return is called cost of capital (KPMG, 2005). The opportunity cost of investment in notes is reflected in cost of capital and hence it is a very important parameter for any compan y (Civil Aviation Authority, 2001). The two