Risk/Return / cAPM / WACC

Question 1

What is risk in the market

Answer 1

dispersion in potential outcomes

Question 2

what is dispersion

Answer 2

many different options in outcomes based on scenarios

Question 3

what is no dispursion

Answer 3

No different options, it has zero variance and no risk

Question 4

what is risk adverse

Answer 4

investor does not like risk, require compensation for taking risk and require higher return

Question 5

expected returns have what two components

Answer 5

risk free rate = x%

risk premium - Expec. returns - Risk Free Rate

Question 6

what are the three sources of risk

Answer 6

systematic risk

idiosyncratic risk

Question 7

what is systematic risk

Answer 7

dispersion in outcomes driven by macroenvironment events

Question 8

what is idiosyncratic risk

Answer 8

dispersion in outcomes driven by events specitfic to the stock in question, unrelated to the macro-E

Question 9

What is CAPM

Answer 9

Capital Asset Pricing Model

Question 10

What is MRP

Answer 10

Market Risk Premium

MRP = Expec. Return of Market - Risk Free Rate

Question 11

What is a stock’s Beta?

Answer 11

the measure of systematic risk

if the stock moves with the market it’s 1. if it’s greater than 1, it moved in the direction of the market, but more. visa versa for less than 1