1. Discuss the time value of money and its importance. Explain the relationship of discounting and compounding. Suppose you were considering depositing your savings in one of three banks, all of which pay 5 percent interest; bank A compounds annually, bank B compounds semiannually, and bank C compounds daily. Which bank would you choose? Why?
2. Discuss investor's required rate of return, and how the riskiness of an asset is measured and interpreted. Assess how diversifying investments would affect the riskiness and expected rate of return of a portfolio or combination of assets. Discuss unsystematic risk, systematic risk, characteristic line, beta, portfolio beta, and asset allocation.
This solution discusses the time value of money and investor's rate of return.