Exam 4 Flashcards
Correlation
Measurement of co-movement between two variables
Standard Deviation
Past return volatility of an investment
Coefficient of Variation
Relative measure of risk-return relationship
Negatively Correlated
Moving differently from each other over time
Positively Correlated
Moving together over time
“Firm-Specific Risk”
Diversifiable Risk
“Market Risk”
Non-Diversifiable Risk
Market Risks
Interest Rate, Inflation, Economic Growth, Exchange Rate
Modern Portfolio Theory
Procedure for combining securities into a portfolio to minimize risk
Optimal Portfolio
Best portfolio of securities that achieves the highest expected return for a given risk level
Efficient Portfolio
Portfolio that achieves the highest return for each level of risk
Efficient Frontier
Set of all efficient portfolios
Dominant Porfolio
Portfoliothat achieves higher return than one with comparable or greater risk
CAPM
RFR + B (Market Rate - RFR)
Market Risk Premium
Market Risk - RFR
Beta
Measurement of sensitivity of company’s stock to market risk
Efficient Market
One in which prices fully reflect available information on each security
Efficient Market Hypothesis
Asset prices reflect all available information
Weak-Form Market
All obtainable trading information available
Semi-Strong Form Market
All public information available
Strong Form Market
All private information available
Is WACC based off market or book value?
Market value
WACC
Weighted-average after-tax cost of capital used by firm
Expected Return
Average of the possible returns weighted by the likelihood of those returns occuring
Risk Free Rate
The return on a U.S. treasury security
Should WACC be based on current or proposed capital structure?
Proposed
