Equity #28: Return Concepts

Question 1

FORMULA: Holding period return

Answer 1

r = [(P1 +CF1)/P0]-1

Question 2

What is the assets’ required return?

Answer 2

min. expected return an investor requires

Question 3

Asset is overvalued or undervalued when Expected return > Required return?

Answer 3

undervalued

Question 4

Required return > Expected return, asset value is over or under valued?

Answer 4

overvalued

Question 5

discount rate is used to find the future or present value of the investment?

Answer 5

present

Question 6

What is the IRR for?

Answer 6

Internal rate of return (IRR) is rate that = discounted cash flows to the current price

Question 7

What is the equity risk premium?

Answer 7

return over the rfr that investors require for holding the securities

Question 8

FORMULA: CAPM Required return for stock

Answer 8

= rfr + (Beta)(ERP) where ERP is equity risk premium

Question 9

What are 3 types of fwd looking estimates for ERP (equity risk premium)?

Answer 9

Gordon growth, Macroeconomics models. survey estimates

Question 10

FORMULA: Multifactor model required return

Answer 10

rr = RF + (risk prem)1 +(risk prem)2

Question 11

Difference btwn Pastor-Stambaugh model and Fama-French model

Answer 11

Pastor-Stambaugh adds liquidity factor

Question 12

FORMULA: adjusted beta

Answer 12

[(2/3)(regression beta)]+[(1/3)(1)]

Question 13

When dealing with emerging market and adding premium, what is diff btwn country spread model and country risk rating model?

Answer 13

country spread model uses corresponding developed markets and adds EM premium (bond yields). country risk rating estimates ERP for developed and replaced inputs for EM

Question 14

FORMULA: WACC

Answer 14

WACC = [(MVdebt/MVdebt+equity)(returndebt)(1-tax)] +(MVequity/MVdebt+equity0