Systematic risk - Also known as non-diversifiable risk, attributable to market factors that
affect all firms; can't be eliminated through diversification
Unsystematic risk - Also known as diversifiable risk, attributable to firm-specific, random
causes; can be eliminated through diversificat...
Systematic risk - Also known as non-diversifiable risk, attributable to market factors that
affect all firms; can't be eliminated through diversification
Unsystematic risk - Also known as diversifiable risk, attributable to firm-specific, random
causes; can be eliminated through diversification.
Beta - Relative measure of non-diversifiable risk. An index of the degree of movement
of an asset's return in response to a change in the market return
CAPM(Capital Asset Pricing Model) - Describes the relationship btw the required return
and the non-diversifiable risk of the firm as measured by beta.
CAPM(2) - The basic theory that links risk and return for all assets
SML(Security Market Line) - Depiction of the CAPM as a graph that reflects the required
return in the marketplace for each level of non-diversifiable risk
Risk Averse - The attitude toward risk where investors would require an increased
return as compensation for an increase in risk
Annuity - A stream of equal periodic cash flows over a specified time period. These
cash flows can be inflows or outflows
Annuity Due - An annuity for which the cash flow occurs at the beginning of each period
Bond - Long-term debt instrument used by business and government to raise large
sums of money, generally from a diverse group of lenders
Preferred Stock - A special form of ownership having a fixed periodic dividend that must
be paid prior to payment of any dividends to common stockholders
Common Stock - The purest and most basic form of corporate ownership
Gordon Model - Also known as the constant growth model that is widely cited in
dividend valuation
Diversification - Reduces risk, combines to adds assets that have a low correlation with
each other
Risk - A measure of uncertainty surrounding the return that an investment will earn or,
more formally, the variability of returns associated with a given asset
, C.V.(Coefficient of variation) - A measure of relative dispersion that is useful in
comparing the risks of assets with differing expected returns
Payback Method - How long it takes to recover an investment
NPV - The best and correct method. Most theoretical method
Advantages of NPV - Answer is in dollars, shows the change in the value of the firm,
reinvestment rate assumption for the cash flows is the discount rate
Disadvantage of NPV - Some managers don't understand the answer or misinterpret the
answer
Formula for NPV - Cost of capital adjusted by the risk of the cash flows -initial
investment from PV total
IRR - The discount rate that makes the present value of the cash inflows equal the initial
investment(similar to bond yields)
Rule of IRR - If IRR is > required return(cost of capital) than accept the project
Advantages of IRR - Answer is is a yield of rate of return, managers like an answer as a
rate of return
Disadvantages of IRR - If the cf can't be reinvested at the IRR rate, the IRR calculation
is incorrect
IRR(fill in the blank) - With the mutually exclusive projects, the __ may give the wrong
project selection.(conflict with the NPV due to the reinvestment rate assumption)
Timing differences and scale effect - The 2 conditions for IRR are the _ _ and _ _
PI (Profitability Index) - the present value of cash flows divided by the initial
investment(its a ratio)
MIRR(Modified IRR) - Use the required rate of returns to adjust the expected cash flows
Rule of MIRR - iF MIRR is equal to or larger than Cost of Capital accept the project
Advantages of MIRR - Cf are reinvested at the cost of capital(better assumption), single
solution when there are embedded negative cfs, MIRR is superior to IRR
Disadvantages of MIRR - Conflict can still occur with NPV, if there is a scale effect, NPV
is superior
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller EvaTee. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $13.49. You're not tied to anything after your purchase.
