Measures of Return
Financial market assets generate two different streams of return: income through cash dividends or interest payments and capital growth through asset price appreciation. Headline stock market indices typically report on price appreciation only. They do not include the dividend income…
What Are Asset Classes?
Introduction Asset classes are groups of investments that share similar characteristics, expected returns, risks, and responses to economic conditions. The primary asset classes include equities, fixed income, cash equivalents, real estate, commodities, and alternative investments. Understanding the characteristics of each…
Business, Sales, Operating Risk, and Financial Risks
Risk can be defined in several ways. However, one fairly simple definition is, “risk refers to the uncertainty of a return and the potential for financial loss.” Risk can arise from both financing and operating activities and can be classified…
DOL, DFL and DTL
The Degree of Operating Leverage, Degree of Financial Leverage, and Degree of Total Leverage are three important ratios that help us to quantify a company’s exposure to operational risk, financial risk, and a combination of the two, respectively. Degree of…
Effect of Financial Leverage on Net Income and ROE
Financial leverage refers to the extent to which a company finances its operations using fixed-cost financial obligations such as debt and preferred equity. The more a company uses debt financing, the higher its financial leverage and exposure to financial…
Breakeven Quantity of Sales
“Breakeven point” or “breakeven quantity of sales” refers to the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Computing Breakeven Quantity of Sales At the point where…
Operating Breakeven Quantity of Sales
The breakeven quantity of sales or just simply breakeven point indicates the number of units of a company’s product that is produced and sold at which point the company’s net income becomes zero. Similarly, we can specify the breakeven point…
Dividends
When a company pays dividends to its shareholders, it is giving them a portion of its earnings. The amount that is paid to each shareholder is dependent on the number of shares that they own. Indeed, the payout and is…
Mean, Variance and Covariance
What Are Mean, Variance and Covariance? Mean, variance, and covariance are three of the most important statistical measures used in portfolio management. Together, they help investors evaluate expected returns, measure investment risk and understand how different assets move in relation…
Risk Aversion
Introduction Risk aversion is an investor’s preference for certainty over uncertainty. Risk-averse investors generally prefer investments that offer more predictable returns rather than accepting higher levels of risk for the possibility of greater rewards. In portfolio management, risk aversion influences…
