WACC

Question 1

What is risk?

Answer 1

The uncertainty over future selling price and cashflows received from an investment

Question 2

What are the types of risk?

Answer 2

Business risk (offering credit with no collateral)
Credit/default risk
Liquidity risk (not meeting short-term debt requirements)
Currency risk
Interest rate risk
Inflation risk
Economic risk (changes in sovereign policy, market fluctuations)

Question 3

What is the return of your investment?

Answer 3

the dividend yield plus the capital gain

Question 4

When looking at the historical return of US common stocks, what do we notice?

Answer 4

A normal distribution. An investor’s expected returns would be around the mean, while the variance and standard deviation show the risk of the investment and its deviation from the mean. The spread of the curve shows the market volatility (small companies present a wider spread than big company returns)

Question 5

Why is the risk on an individual stock an insufficient measure of risk?

Answer 5

• They can build a portfolio of multiple stocks and reduce the risk by diversifying
  
  • We care about the contribution of every stock
  • Stock returns are linked to each other
    We have to look at the risk and return of a PORTFOLIO

Question 6

What does the correlation coefficient show?

Answer 6

the degree to which two variables (stock returns) are associated
Can go from -1 to 1 (the closer to 0, the more diversified the portfolio becomes)
It gives the strength of the relationship whereas the covariance only gives the direction of the relationship

Question 7

What component of risk cannot be reduced through diversification?

Answer 7

Market risk (or systematic risk according to Rougier)

Question 8

How is market risk given?

Answer 8

By Beta given by COV(rm, ra)/Var(rm)
Or correlation(rm,ra)*stddev(ra)/stddev(rm)

Question 9

How to find the beta of a portfolio

Answer 9

the sum of all wi*Bi

Question 10

Where to find risk free rate

Answer 10

10-year old OAT rate

Question 11

Where to find risk premium

Answer 11

5,5% historical in france, check Damodaran website

Question 12

Where to find beta

Answer 12

Bloomberg, Thomson Reuters, Yahoo Finance

Question 13

WACC formula

Answer 13

e/e+dre+d/e+drd*(1-t)

Question 14

In a normal distribution curve, what are the probabilities a value is comprised between -1 stddev and 1 stddev?

Answer 14

68.26%

Question 15

In a normal distribution curve what are the chances that a variable is between -2 stddev and 2 stddev?

Answer 15

95.44%

Question 16

In a normal distribution curve what are the chances that a variable is between -3 stddev and 3 stddev?

Answer 16

99.74%