8 & 9. Risk And Return Flashcards
1
Q
How do you reduce the alpha risk
A
Diversity in your portfolio
Don’t put all your eggs in one basket
2
Q
What is the cost of capital
A
The minimum return investors require
3
Q
How do you calculate ex div
A
Ex div = p cum div - div
4
Q
How do you work out the cost of equity
And then with growth
A
Ke = D/P0
Ke =D yr1 / p0 + growth rate
5
Q
Issues with dividend valuation model
A
Growth may not be constant
Dividends may be zero
6
Q
What is WACC
A
Weighted average cost of capital
All funds from financing go into a pool from which capital investment
WACC is used as discount rate in NPV decisions
