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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


portfolio

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 riskreturn measure for portfolio

expected return and standard deviation


realized returns are (blank) equal to expected returns

NOT


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


diversification

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

diversification


total risk

systematic + unsystmatic = toal risk


beta

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

beta


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

advanadjusts of systematic risk, applicable to all companies
disadvanhave 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


WACC

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
