Week 6 – discussion financial mgmt- due by wed @ 5pm cst
The average return, also known as expected returns or the expected returns of an investment, is the rate of return that an investor could expect over a certain period. Investors expecting greater average returns need to be more risk-averse as they are not guaranteed the results that they desire. There are two ways to calculate the average return over multiple years: Arithmetic and geometric. Arithmetic averages simply add up all numbers, divide by total number and then find the geometric mean. Then take the nth roots (where n is the total number). Although this method is more accurate in compounding interest adjustments, it tends to produce lower results than an arithmetic means. A geometric mean finds the product of all numbers and then takes the nth root (where n is total number). The risk premiums investors accept in return for greater uncertainty or volatility in their investments. They may receive cash bonuses, stock options, or any other form of compensation depending on the particular situation/valuation.
If a risk premium is paid based on market performance, it could offer generous payouts. But accounting procedures must be able to withstand the fluctuations.