Key Takeaways
- The central question for every investment: "Is the expected return sufficient compensation for the risk, given the alternatives?"
- A complete analysis integrates TVM, discount rate construction, risk classification, risk-adjusted returns, real returns, and opportunity cost.
- NPV is the definitive accept/reject criterion; IRR aids ranking; sensitivity analysis reveals which assumptions matter most.
- Leverage amplifies both gains and losses — stress-test leverage at GFC-level declines (25–30%) before committing.
- Sound assumptions matter more than sophisticated techniques — focus on getting the big inputs right.
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Test Your Knowledge
1.Which metric is the most reliable accept/reject criterion for an individual investment?
2.Over 30 years, approximately how much more does 10% compounding produce compared to 7% compounding on the same initial investment?
3.Which of the following best describes the relationship between Monte Carlo simulation and sensitivity analysis?
4.What is the most important lesson about leverage from the 2007–2009 Global Financial Crisis?