PRESENT VALUE AND THE RISK/RETURN TRADE-OFF

Module 1 – Background

PRESENT VALUE AND THE RISK/RETURN TRADE-OFF

To begin the module, start off with these two videos to give yourself an overview of the main concepts covered in this module. The first video is from Professor Holthausen of the Wharton School of Business at the University of Pennsylvania. He explains the concept of the time value of money and also goes through some calculations using Microsoft Excel. The second video is from Professor Pinder of the University of Melbourne and covers some basic concepts of risk and return.

University of PennsylvaniaHolthausen, R. (2015). Time value of money. Coursera. Retrieved from: https://www.coursera.org/learn/wharton-decision-making-scenarios/lecture/ZE2tE/1-2-time-value-of-money

 

Unversity of Melbourne

 

Pinder, S. (2017) Unsystematic versus systematic risk. Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/LLtZP/2-1-unsystematic-versus-systematic-risk-getting-rid-of-unrewarded-risk

 

 

A second video from Dr. Pinder on the capital asset pricing model is highly recommended but not required. A link to Dr. Pinder’s video is included under the optional reading list below.

Once you have finished viewing the videos, take a closer look at the concepts covered in the videos by reading through these book chapters. In addition to reading about the basic concepts, make sure to work through some of the numerical examples as these will help you with your assignments:

time and money scale

 

Vishwanath, S. (2007). Chapter 2: Time value of money. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

 

 

risk and reward tightwire

 

 

Vishwanath, S. (2007). Chapter 3: Risk and return. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

 

 

If you have any difficulty with the material above, it is highly recommended that you take a look at some of the optional readings below. The materials below cover the same material but sometimes concepts can be absorbed better if you see some explained in a different manner or see additional examples.

Finally, if you don’t have much experience with Microsoft Excel then please take a look at the following videos:

Davis, J. (2013). Present value of a single amount in Excel. Retrieved from:  https://www.youtube.com/watch?v=ruIfnNoe1Co&t=85s

Moy, R. (2014). Present value of multiple cash flows in Excel. Retrieved from:  https://www.youtube.com/watch?v=kDOIuJbHpLc

Codible. (2012). Future value for a series of annual deposits. Retrieved from:  https://www.youtube.com/watch?v=EcfmEVVHDsw

Optional Reading

Pinder, S. (2017). Capital asset pricing model (It’s all about the discount rate). Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/6Oh5F/2-2-capital-asset-pricing-model-its-all-about-the-discount-rate

Module 1 – Home

PRESENT VALUE AND THE RISK/RETURN TRADE-OFF

Modular Learning Outcomes

Upon successful completion of this module, the student will be able to satisfy the following outcomes:

· Case

· Understand and calculate present and future value.

· Identify and explain the risk and reward trade-off in investments.

· Analyze investments using the capital asset pricing model.

· SLP

· Identify and explain the risk and reward trade-off in investments.

· Analyze investments using the capital asset pricing model.

· Discussion

· Identify and evaluate sources of information on finance.

Module Overview

ScalesIf your boss offered you a $500 bonus to be paid now or paid one year in the future, which option would you choose? I’m confident you would choose to be paid now. This simple preference of having money now instead of the same amount paid in the future is actually a major principle of finance that will be discussed not only in Module 1 but throughout this class. The concept of the time value of money is key to finance.

Further concepts of the time value of money include future value. An example of this is if you took the $500 bonus now and put it in the bank for a year. If you receive a 2% interest rate, the future value of your $500 would be $510 (500*1.02). There is also the concept of present value. Suppose you decide to accept the bonus to be paid in one year instead of now. The present value with a 2% interest rate would be the amount you would have to put in the bank in order for your bank account to be worth $500 in one year. We can compute this by dividing 500 by 1.02 which gives you $490.20. So based on the concept of present value, $500 today is worth more than having $500 in the future.

Another key concept of finance is the risk-return trade-off. When making investment decisions, you have the choice between investments that are very safe such as putting your money in a savings account in a bank or riskier investments such as investing in high-tech companies. But if you choose the riskier investment, you definitely want to be rewarded for taking the risk. Hence, it would not be wise to invest in a company if you can only expect the same return as if you put the money in a bank account. In order to make it worthwhile to accept risk and the potential loss of money, you also want to have an upside in terms of a higher potential return. In this module we will be discussing the capital asset pricing model,which is a key tool designed to assess the proper trade-offs between risk and reward.

COURSE MATERIALS/BIBLIOGRAPHY

Module 1

Required Material

Holthausen, R. (2015). Time value of money. Coursera. Retrieved from:  https://www.coursera.org/learn/wharton-decision-making-scenarios/lecture/ZE2tE/1-2-time-value-of-money

Pinder, S. (2017) Unsystematic versus systematic risk. Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/LLtZP/2-1-unsystematic-versus-systematic-risk-getting-rid-of-unrewarded-risk

Vishwanath, S. (2007). Chapter 2: Time value of money. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

Vishwanath, S. (2007). Chapter 3: Risk and return. Corporate finance: Theory and practice. SAGE Publications India. Available in the Trident Online Library.

Davis, J. (2013). Present value of a single amount in Excel. Retrieved from:  https://www.youtube.com/watch?v=ruIfnNoe1Co&t=85s

Moy, R. (2014). Present value of multiple cash flows in Excel. Retrieved from:  https://www.youtube.com/watch?v=kDOIuJbHpLc

Codible. (2012). Future value for a series of annual deposits. Retrieved from:  https://www.youtube.com/watch?v=EcfmEVVHDsw

Optional Material

Pinder, S. (2017). Capital asset pricing model (It’s all about the discount rate). Coursera. Retrieved from: https://www.coursera.org/learn/valuation/lecture/6Oh5F/2-2-capital-asset-pricing-model-its-all-about-the-discount-rate

Clifford, J. (2014). Time value of money. ACDC Leadership. Retrieved from:  https://www.youtube.com/watch?v=nfkqCv3Rd_g