Module Five
Question One
The required rate of return refers to the return that a given investor is needed to convert a given investment into an asset or a project. On most occasions, the required rate of returns represents the with a given investment (Penman, 2016). On the other hand, the expected rate of return refers to the expected returns that an investor is expected to receive after a given investment is accomplished. When there is a difference between the two, it means that the economic conditions are not normal. That is, the market may be experiencing either deflation or inflation (Penman, 2016).
Question Two
The main difference between expected return and the total holding period returns is that the expected return denotes the total amount of profit or losses that an investor anticipates for a given investment. Generally, the expected returns are often calculated based on the possible returns in a given investment. On the other hand, the total holding period return refers to the total returns that have been earned from an investment during the period of holding a given asset (Penman, 2016).
Question Three
Diversification is one of the strategies that lay a foundation for reducing risks by allocating investments in different financial instruments and categories. By investing in more than one asset, an investor can maximize returns in areas that are likely to be affected negatively by the changes in market conditions (Zhukovskiy et al., 2020).
References
Penman, S. (2016). Valuation: accounting for risk and the expected return. Abacus, 52(1), 106-130.
https://onlinelibrary.wiley.com/doi/full/10.1111/abac.12067
Zhukovskiy, A., Falkenbach, H., & Bouchouicha, R. (2020). Debt diversification and investments of European listed real estate companies. Journal of European Real Estate Research.
