Evaluate Internal and External Growth Strategies
The United States has five important financial instruments that yield returns. These financial instruments are the large company common stocks, small company common stocks, long term corporate bonds, long term U.S. Government bonds, and U.S. Treasury Bills (Ross et al, 2005). Stocks offer a higher rate of return than bonds or U.S. Treasury Bills. Investors can measure how much obtained on an investment by figuring out the holding period return, which is “is calculated as the sum of all income and capital growth divided by the value at the beginning of the period being measured” (Investopedia, 2009, para. 1). Additionally, capital market returns maybe summarized using the average return or the series of returns generated over a period of time.
Generally, stocks offer investors risky returns due to the volatility related with the stock market. Risk-free returns, which are associated with Treasury bills and bonds have low-variability returns. According to Ross et al (2005), the “difference between risky returns and risk-free returns is often called the excess return on the risky asset” (p. 246). The excess is the “additional return resulting from the riskiness of common stocks and is interpreted as an equity risk premium” (Ross et al, 2005, p. 246). Using risk...
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