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