Chapter 11: The cost of capital

Question 1

Beta factors:

Answer 1

Measures the average change in the return on a share each time there is a change in the stock market as a whole.

Question 2

Market risk premium/equity risk premium:

Answer 2

This is the difference between the expected average market return and the risk-free rate of return over the same period.

Question 3

Systematic (or market) risk:

Answer 3

The component of risk that will still remain even if a diversified portfolio has been created.

Question 4

Unsystematic (or specific) risk:

Answer 4

The component of risk that is associated with investing in a particular company.