Returns to an Asset Essay Example | Topics and Well Written Essays - 2000 words

Returns to an Asset - Essay Example Having knowledge of the statistical properties also makes it easier to evaluate the efficiency of the financial assets. The financial assets are then modelled for better knowledge of the returns. Background to the Data Sample There are many concepts that are adopted in the finance to make the concept of finance management more clear. Some of the concepts are considered to the appropriate for other branches and some are altered to suite the financial setup. Interest is considered as one of the fundamental concepts incorporated in finance and related organizations. Interest is termed as the fixed profit over an investment in a particular time frame. Mostly, it is calculated in terms of percentage, like if a person invests ?100 and the rate of interest is 5% in a year, the organization that deposited the amount will have to pay ?105 in a year (Wang, Lecture 1, n.d.,). Sometimes the rate of interest is divided into monthly basis like if the interest rate of 5% is divided into monthly ins talments, the person that deposited the sum will be given 0.4% per month. Interest has two types; compound interest and simple interest. The simple interest is only applied to the original amount. Like if a person deposited ?100 in bank at the rate of 5% simple interest annually, he will be given interest on ?100 every year. The compound interest in applied on the original amount plus the interest amount. ... The probability of 1 is about 1/6, as the die has six sides. The probability of each side is 1/6. On the other hand, the coin has two sides and if it is tossed ones, the probability of each side is ?. Thus, it can be said that the probability of a certain event remains between 0 and 1. The probability depicts the risk factor (Wang, Lecture 2, n.d.,). Discrete returns are liked most due to the fact that the calculation based on the discrete returns is simpler and the rate of profit represents the real profit. There is less formulation required to evaluate the discrete returns. For example, Mr. X buy a stock share for ?10, the very next day, he wanted to sell the share and sold it in ?11. Thus the profit, he attained while selling the stock share is about ?1, which is about 10% of the ?10 or original investment. On the other hand, the logarithmic value of the whole scenario give the percentage profit of about 9.53%, which is less than the original profit. Thus, the discrete returns hav e remained to be correct in the given scenario but the log returns proved to be incorrect. Log returns are regarded as to be most likely to generate statistical information and thus, the financial modellers like the concept of the log returns. It shows the statistical information for some period of time and thus the financial efficiency of the financial asset can be modelled. It creates an approximation of the true value of the financial asset. The log normal distribution creates a financial value over a period of time regarding the total financial asset. Log normal distributions do not generate a negative value. The two images above show the difference between the Normal Density and Log normal density. Value at Risk (VAR) Value at risk is a Statistical