Module 13 Flashcards

1
Q

Business risk examples (4)

A
  • Operational failings
  • Government action
  • Failure in strategy
  • Technological change
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2
Q

Non business risks (2)

A
  • Event risk

- Financial risk

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3
Q

Event risk

A

Arises due to an adverse event eg natural disaster

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4
Q

Financial risk (3)

A

Arises from long term/ short term factors:

  • Credit risk
  • Liquidity risk
  • Currency and interest rate risk
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5
Q

Risk management

A

The process of assessing risk and adopting policies to manage this risk to an acceptable level

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6
Q

Risk management examples (3)

A
  • Risk mapping
  • Policy options
  • Risk register
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7
Q

Risk of an individual share measured by

A

Standard deviation

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8
Q

Shareholders reduce the risk (measured by standard deviation) through

A

Diversification

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9
Q

Type of risk reduced through diversification =

A

Unique/ specific risk

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10
Q

Market (systematic risk)

A

Portion of risk that will still remain even if diversified portfolio has been created

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11
Q

Beta factor measures

A

Market risk

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12
Q

Beta factor =

A

Measure of the sensitivity of a share to movements in the overall market

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13
Q

Beta factor < 1

A

Below average risk

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14
Q

Beta factor = 1

A

Average risk

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15
Q

Beta factor > 1

A

Above average risk

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16
Q

Negative beta

A

Security price moves in opposite direction to market as a whole.

Rare, eg gold

17
Q

Can measure portfolio risk

A

In terms of average of the beta of the securities held

18
Q

Risk premium =

A

Difference between the average stock market return and the risk free rate

19
Q

CAPM formula =

A

r = rf + beta ( risk premium)

20
Q

CAPM expresses

A

Required rate of return on any security

21
Q

Ungeared (asset) beta measures only

A

Business risk (NOT financial)

22
Q

Beta application to investment appraisal > Step 1

A

Ungear the equity beta relating to the comparable company

23
Q

Beta application to investment appraisal > Step 2

A

Re-gear this asset beta with the capital structure to be used in the new investment

24
Q

Beta application to investment appraisal > Step 3

A

Use the adjusted equity beta to calculate a cost of equity to use in the appraisal of the project

25
Q

Application of CAPM to share valuation > Step 1

A

Ungear the equity beta relating to the comparable company

26
Q

Application of CAPM to share valuation > Step 2

A

Re-gear this asset beta with the capital structure of the unlisted company or division that is being valued

27
Q

Application of CAPM to share valuation > Step 3

A

Use the adjusted equity beta to calculate a cost of equity to use in the valuation