Lecture 1

Question 1

What does “Risk is Priced” mean

Answer 1

Perceptions of risk from a investment affects the willingness to pay.

Risk and price are negatively related

Question 2

procyclic meaning

Answer 2

organization does well when market does well

Question 3

Systematic risk

Answer 3

risk of the whole market doing poorly together with the organization

Question 4

Idiosyncratic risk

Answer 4

risk that is particular to a specific investment, not affected by markets or industries

Question 5

! CAPM (Capital asset pricing model) equation

Answer 5

E[R] = rf + B * (E[Rmkt] - rf)

E[R] - expected return
rf - risk-free rate
B - (beta) - scalability (if market moves 1%, how does the stock move)

Question 6

Risk premium

Answer 6

Amount of excess return required to compensate for increased risk

Risk premium = E[Rmkt] - rf

Question 7

0 coupon bond

Answer 7

Bond which pays no intermediate payments, only one repayment at the end

Question 8

Coupon bond

Answer 8

Bond which pays intermediate payments

Question 9

Residual claim meaning

Answer 9

The rights of shareholders to the remaining assets once the fixed claims on a business have been met (shareholders get paid last)