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Study Guide for Exam 3 – Covering Chapter 7 (Risk & Return) & Chapter 10 (NPV/IRR/Payback) (Chapter 11, Project Cash Flows, will not be covered on Exam 3 – even though some of Chapter 11 may be covered before Exam 3) Chapter 7 – Risk & Return: •Quantitative oGiven Returns w/associated probabilities Calculate expected return Calculate variance Calculate standard deviation oConvert coefficient of correlation to covariance & vice-versa oCalculate and apply coefficient of variation oCalculate and apply Sharpe ratio oCalculate portfolio returns – given returns & portfolio weights (no formula given) Just multiply each asset’s returns by the fraction of the portfolio (it represents) and then sum-up the terms oCalculate portfolio variance & std. deviation – given weights, individual standard deviations, and covariance (or correlation) – (see formula sheet – use the formula directly – plug and chug – just be careful whether or not I am asking for the standard deviation – or just the variance! – the formula on the formula sheet is for the VARIANCE of the 2-stock portfolio….take the square-root of the variance to get the standard deviation….always read the question carefully!) oCAPM formula (see formula sheet) Understand and apply the difference between risk premium (of the individual stock or whole market) and the return (of the individual stock or the whole market) Given 3 variables – solve for the missing variable Just plug what you are given into the formula and do the algebra to solve for what you