The goal of most investors is to maximize their wealth by making intelligent investment
decisions.
The investment decisions are in terms of return and risk.
Return; Returns are the fundamental measure of Investment performance which is measured in
terms of profit and capital appreciation. In real estate finance returns are in the following components;
-Rental income
-Capital appreciation
-Opportunity costs
Measurement of Return;Profit + capital appreciation i.e. using the Holding period yield
Risk;Investment risk can be defined as the possibility that future cash flows and therefore returns and values will be different from what was expected when the investment was undertaken.
A risk refers to the probability of earning a return greater or less than the expected return.
Probability distributions provide the foundation for risk measurement since probability distribution defines the likelihood of certain events occurring.
The greater the risk, the greater must be the potential compensation.
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