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38 Cards in this Set

  • Front
  • Back
expected return
return on a risky asset expected in the future
risk premium
expected return - risk free rate = risk premium
group of assests such as stocks and bonds held by an investor
portfolio weight
% of a portfolio's total value in a particular asset
total return
expected return + unexpected return = total return
what are expected returns based on
probabiities and outcomes
what measures the volatility of returns
variance and standard deviation
what 2 ways are risk-return measure for portfolio
expected return and standard deviation
realized returns are (blank) equal to expected returns
annoucements and news
expected and surprise componenet. surprise compoenent make up stock price and return
eficient markets
results of investors trading on the unexpected portion of annoucements
systematic risk or market risk
risk that influences a large number of assets....such as GDP,inflation,interest rates
unsystematic risk
risk that affects at most a small number of assets.....labor strikes, parts shortages
is investing in several different assets classes or sectors...not just alot of assets
what can reduce variability of returns without an equivilent reduction in expected returns
total risk
systematic + unsystmatic = toal risk
amount of systematic risk present in a particular risky asset relative to that in an average risky asset
beta of 1...<1....>1
beta of 1: same systmeatic risk as overall market
beta <1: implies hs less systematic risk than ov market
betta>1 more " " "
higher the beta...
higher the risk premium should be
security market line
market eqilibrim or relationship b/t systmeatic risk and expected returns
capital asset pricing model
defines relationship b/t risk and return and used to calculate expected return
how do we measure amount of systematic risk
how do we measure bearing systmeatic risk
risk premium
what is epected return on stock if it was beta of .9, risk free of .03 and risk preium of .08
=rf + [risk premium(beta)]
=.03 + [.08(.9)]
cost of captial
required rate that would be used in capital budgeting
marginal cost of capital
additional capital needed to be raised
any investment must generate atleast what?
the cost of capital
return to investor
same as the cost to teh company
cost of capital provides us with in an indication
of how the market views the risk of our assets
what happens when NPV = 0
IRR = cost of capital......making excatly what the suppliers require
cost of equity
return that equity investos require on their investment in the firm
2 methods of determining cost of equity
-divident growth
-sml or capm
disadvantage of divident growth
-only applicable to companies paying div
-not applicable if not paying at constant rate
-sensitive to growth rate
advan and disadvan of sml
advan-adjusts of systematic risk, applicable to all companies

disadvan-have to estimate things
cost of debt
required return on our companies debt and is NOT the coupon rate
required return on debt is computed by
yield to maturity on exsisting debt
weighted average cost of equity and after tax cost of debt
WACC formula
weight of equity * cost of equity + weight of debt * cost of debt * 1 - tax rate